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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, 2002
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
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. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES |_| NO |X|
1
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based on the last sales price quoted on the
Nasdaq National Market System on June 28, 2002, the last business day of the
registrant's most recently completed second fiscal quarter, was approximately
$30,122,791*.
As of March 27, 2003, the Registrant had issued 4,403,803 shares of the
Registrant's Common Stock. In addition, it had also repurchased 956,841 shares
that were being held as treasury stock.
DOCUMENTS INCORPORATED BY REFERENCE
PART III of Form 10-K--Portions of the Proxy Statement for the 2003
Annual Meeting of Stockholders.
* Based on the closing price of the Registrant's Common Stock on June 28, 2002,
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.
2
COVEST BANCSHARES, INC.
2002 ANNUAL REPORT ON FORM 10-K
Table of Contents
Page
Number
PART I
Item 1. Business ................................................................ 5
Item 2. Properties .............................................................. 32
Item 3. Legal Proceedings ....................................................... 32
Item 4. Submission of Matters to a Vote of Security Holders ..................... 32
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters .................................................. 33
Item 6. Selected Financial Data ................................................. 35
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition .............................................. 37
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .............. 49
Item 8. Consolidated Financial Statements ....................................... 53
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure ........................................................... 84
PART III
Item 10. Directors and Executive Officers of the Registrant ...................... 84
Item 11. Executive Compensation .................................................. 84
Item 12. Security Ownership of Certain Beneficial Owners and Management ......... 84
Item 13. Certain Relationships and Related Transactions .......................... 85
Item 14. Controls and Procedures ................................................. 85
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........ 86
SIGNATURE ......................................................................... 87
3
PART I
SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This document (including information incorporated by reference) contains, and
future oral and written statements of CoVest Bancshares, Inc., a Delaware
corporation (the "Company") and its management may contain, forward-looking
statements, within the meaning of such term in the Private Securities Litigation
Reform Act of 1995, with respect to the financial condition, results of
operations, plans, objectives, future performance and business of the Company.
Forward-looking statements, which may be based upon beliefs, expectations and
assumptions of the Company's management and on information currently available
to management, are generally identifiable by the use of words such as "believe,"
"expect," "anticipate," "plan," "intend," "estimate," "may," "will," "would,"
"could," "should" or other similar expressions. Additionally, all statements in
this document, including forward-looking statements, speak only as of the date
they are made, and the Company undertakes no obligation to update any statement
in light of new information or future events.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
o The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which may
be less favorable than expected and may result in, among other things, a
deterioration in the credit quality and value of the Company's assets.
o The economic impact of past and any future terrorist attacks, acts of war
or threats thereof and the response of the United States to any such
threats and attacks.
o The effects of, and changes in, federal, state and local laws, regulations
and policies affecting banking, securities, insurance and monetary and
financial matters.
o The effects of changes in interest rates (including the effects of changes
in the rate of prepayments of the Company's assets) and the policies of
the Board of Governors of the Federal Reserve System.
o The ability of the Company to compete with other financial institutions as
effectively as the Company currently intends due to increases in
competitive pressures in the financial services sector.
o The inability of the Company to obtain new customers and to retain
existing customers.
o The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such
as the Internet.
o Technological changes implemented by the Company and by other parties,
including third party vendors, which may be more difficult or more
expensive than anticipated or which may have unforeseen consequences to
the Company and its customers.
o The ability of the Company to develop and maintain secure and reliable
electronic systems.
o The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives and
employees in an effective manner.
o Consumer spending and saving habits which may change in a manner that
affects the Company's business adversely.
4
o Business combinations and the integration of acquired businesses which may
be more difficult or expensive than expected.
o The costs, effects and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies and the Financial Accounting Standards
Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Additional information concerning the Company and its business, including other
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
ITEM 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 entered into an Agreement and Plan of Reorganization with Midwest
Banc Holdings, Inc. ("Midwest Banc") on November 1, 2002 (the "Merger
Agreement") that, if approved by the Company's stockholders at a special meeting
of stockholders, will result in the Company being merged with and into Midwest
Banc. The special meeting of stockholders originally scheduled for March 17,
2003, was cancelled after Midwest Banc informed the Company that bank regulatory
agencies would be delaying the processing of Midwest's applications to acquire
the Company.
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 real estate loans in its primary
market area. The Company also originates consumer loans and invests in
securities. 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 origination fees, and
proceeds from the sale of annuity and insurance products through CII. 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.
5
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 that had a
population of approximately 55,250 in 2000. 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
2000 census, it had a population of approximately 76,500.
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
75,000 in 2000.
Des Plaines and parts of the surrounding contiguous communities such as Park
Ridge, Niles, Mount Prospect, Arlington Heights, Prospect Heights, Buffalo
Grove, Schaumburg and Hoffman Estates have historically constituted the
Company's primary market area. These 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 are engaged in the retail trade of 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 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 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, 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.
Beginning in 1996, the Bank began a major balance sheet restructuring project,
and is now a full-service commercial bank.
The Bank 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.
6
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,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in Thousands)
Commercial loans $ 56,519 10.43% $ 46,770 9.08% $ 36,397 7.21% $ 17,207 3.69% $ 8,035 1.98%
Real estate loans
One-to-four family(1) 55,485 10.24 59,551 11.56 121,076 23.98 130,235 27.91 154,182 37.94
Multi-family 252,165 46.55 222,556 43.19 162,102 32.09 126,109 27.03 55,661 13.70
Commercial real estate 84,552 15.61 79,403 15.41 79,298 15.70 73,596 15.77 66,776 16.43
Construction 54,587 10.07 58,933 11.44 48,324 9.57 46,177 9.90 40,572 9.98
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 446,789 82.47 420,443 81.60 410,800 81.34 376,117 80.61 317,191 78.05
Commercial leases 522 0.10 1,774 0.34 5,928 1.17 22,029 4.72 35,166 8.66
Consumer loans
Automobile 7,292 1.35 10,661 2.07 15,550 3.08 21,387 4.58 21,036 5.18
Home equity Improvement 28,837 5.32 33,460 6.49 33,567 6.65 27,786 5.96 22,654 5.57
Other 1,773 0.33 2,152 0.42 2,753 0.55 2,066 0.44 2,290 0.56
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans 37,902 7.00 46,273 8.98 51,870 10.28 51,239 10.98 45,980 11.31
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans 541,732 100.00% 515,260 100.00% 504,995 100.00% 466,592 100.00% 406,372 100.00%
====== ====== ====== ====== ======
Net deferred costs 331 907 1,091 938 269
-------- -------- -------- -------- --------
Total loans receivable $542,063 $516,167 $506,086 $467,530 $406,641
======== ======== ======== ======== ========
(1) Including loans held for sale.
7
The following table shows the composition of the Company's loan portfolio by
fixed and adjustable rates at the dates indicated:
December 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in Thousands)
Fixed rate loans
Commercial loans $ 20,319 3.75% $ 21,465 4.17% $ 19,747 3.91% $ 9,799 2.10% $ 1,722 0.42%
Real estate loans
One-to-four family(1) 18,448 3.40 25,486 4.95 54,774 10.85 65,526 14.04 89,390 22.00
Multi-family 11,141 2.06 12,168 2.36 2,736 0.54 4,390 0.94 391 0.10
Commercial real estate 26,033 4.81 44,472 8.63 35,367 7.00 29,687 6.36 19,735 4.86
Construction 3,793 0.70 -- -- -- -- 600 0.13 199 0.05
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 59,415 10.97 82,126 15.94 92,877 18.39 100,203 21.47 109,715 27.01
Commercial leases 522 0.10 1,774 0.34 5,928 1.17 22,029 4.72 35,166 8.65
Consumer loans 16,184 2.98 25,616 4.97 31,618 6.26 31,436 6.74 27,292 6.71
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total fixed rate loans 96,440 17.80 130,981 25.42 150,170 29.73 163,467 35.03 173,895 42.79
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Adjustable-rate loans
Commercial loans 36,200 6.68 25,305 4.91 16,650 3.30 7,408 1.59 6,313 1.56
Real estate loans
One-to-four family 37,037 6.84 34,065 6.61 66,302 13.13 64,709 13.87 64,792 15.94
Multi-family 241,024 44.49 210,388 40.83 159,366 31.56 121,719 26.09 55,270 13.60
Commercial real estate 58,519 10.80 34,931 6.78 43,931 8.70 43,909 9.41 47,041 11.58
Construction 50,794 9.38 58,933 11.44 48,324 9.57 45,577 9.77 40,373 9.93
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 387,374 71.51 338,317 65.66 317,923 62.96 275,914 59.14 207,476 51.05
Consumer loans 21,718 4.01 20,657 4.01 20,252 4.01 19,803 4.24 18,688 4.60
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total adjustable-rate
loans 445,292 82.20 384,279 74.58 354,825 70.27 303,125 64.97 232,477 57.21
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans 541,732 100.00% 515,260 100.00% 504,995 100.00% 466,592 100.00% 406,372 100.00%
====== ====== ====== ====== ======
Net deferred costs 331 907 1,091 938 269
-------- -------- -------- -------- --------
Total loans receivable $542,063 $516,167 $506,086 $467,530 $406,641
======== ======== ======== ======== ========
(1) Including loans held for sale.
Adjustable rate loans are indexed to the prime rate, 91-day Treasury Bill, 1
year, 3 year and 5 year constant maturity Treasuries. The terms of the
multi-family loans and commercial real estate loans are subject to floors and
ceilings for the entire term of the loan. This means that if the rates go down,
the rates on the loans cannot go below the floors level. Some loans may
currently be at their floor level, which in a rising rate environment may not
increase proportionally with the index. On the other hand, when rates go up,
loans that have hit their ceiling, may not go up in relation to their individual
indexes.
8
The following schedule illustrates the contractual maturities of the Company's
loan portfolio at December 31, 2002. Mortgages that 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
Residential Loans Commercial Real
(1) Commercial Loans (2) Estate Loans (3) Consumer Loans (4) Total
------------------ -------------------- ---------------- ------------------ -----
Coming due during Weighted Weighted Weighted Weighted Weighted
years ending Average Average Average Average Average
December 31, Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
- ------------ ------ ---- ------ ---- ------ ---- ------ ---- ------ ----
2003 $ 1,785 6.77% $ 34,545 5.30% $ 71,361 5.96% $ 5,314 6.68% $113,005 5.80%
2004 6,511 6.74 6,488 6.66 20,900 6.17 3,374 6.97 37,273 6.43
2005 1,915 7.52 8,334 7.49 11,425 5.78 2,043 6.85 23,717 6.61
2006 to 2007 3,312 6.95 6,158 6.07 127,212 5.10 2,808 6.75 139,490 5.22
2008 to 2012 6,387 6.61 1,516 5.10 160,406 6.77 24,340 5.71 192,649 6.62
2013 to 2027 25,753 6.71 -- 0.00 -- 0.00 23 9.00 25,776 6.71
2028 and beyond 9,822 6.54 -- 0.00 -- 0.00 -- 0.00 9,822 6.54
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total $ 55,485 6.71% $ 57,041 5.85% $391,304 5.99% $ 37,902 6.10% $541,732 6.08%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
(1) Includes loans held for sale.
(2) Commercial loans consist of commercial loans and commercial leases.
(3) Commercial real estate loans consist of commercial real estate loans,
construction loans and multi-family loans.
(4) Consumer loans consist of home equity, auto and various secured and
unsecured loans.
Approximately $77.0 million in fixed rate loans and $351.7 million in variable
rate loans had maturities in excess of one year at December 31, 2002.
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,
2002, the Bank's regulatory loan-to-one borrower limit was $7.7 million. On the
same date, the Bank's largest lending relationship was $7.5 million. As of
December 31, 2002, the Bank had five relationships in the range of $6.4 million
to $7.0 million.
All of the Company's lending activities is 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 six years, the Company has continued to increase its originations
of commercial real estate loans, multi-family loans and commercial loans.
Management intends to continue to focus on this type of lending. The commercial
real estate loans, multi-family loans and construction loans are secured by
property generally within the Company's market area. Commercial real estate
lending is generally considered to involve a higher level of risk than
single-family residential lending. This is due to concentration of principal in
a limited number of loans and borrowers, the effects of general economic
conditions on real estate developers and managers, and on income producing
properties.
The Company has attempted to minimize the foregoing risks by adopting what
management believes are conservative underwriting guidelines that impose more
stringent loan-to-value ratios, applicant's payment history, cash flow, value of
collateral, and credit worthiness of the business.
9
At December 31, 2002, the Company had $84.5 million in commercial real estate
loans, $54.6 million in construction loans, $56.5 million in commercial loans,
$0.5 million in commercial leases, and $252.2 million in multi-family loans. The
allowance for loan losses included $6.5 million for these types of loans at
December 31, 2002.
Multi-family loans showed the largest dollar increase in 2002. 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. As of
December 31, 2002, 16% of outstanding multi-family loans are out of territory.
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 prime rate
adjustable, weekly three-month treasury bill adjustable, one year adjustable
rate, three year adjustable rate, or five year adjustable rate, adjusting in
accordance with a designated index, that is generally subject to a floor, a
ceiling, prepayment penalties and have a maximum loan-to-value ratio of 80%. The
Company, to augment its liquidity needs and reduce credit exposure, may sell
participations on less than two-year originated multi-family loans. As of
December 31, 2002, $22.3 million of the multi-family loan portfolio had been
participated without recourse.
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. The
Company, to augment its liquidity needs and reduce credit exposure, may sell
participations of construction loans. As of December 31, 2002, $14.0 million of
the construction loan portfolio had been participated without recourse. The
Company intends to limit its exposure in this type of lending in 2003.
Commercial real estate loans are primarily for mixed use properties, owner
occupied office buildings, 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. The Company, to augment its liquidity
needs and reduce credit exposure, may sell participations of commercial real
estate loans. As of December 31, 2002, $5.1 million of the commercial real
estate loan portfolio had been participated without recourse.
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LENDING
In general, the Company retains in its portfolio single-family residential
mortgage loans that provide periodic adjustments of the interest rate
(adjustable-rate mortgage loans). These loans generally have terms of up to
30-years and interest rates which adjust every one or two years in accordance
with an index based on the yield on certain U.S. government securities. A
portion of these loans may guarantee borrowers a fixed rate of interest for the
first three to five years of the loan's term. It is the Company's normal
practice to discount the interest rate it charges on its adjustable-rate
mortgage loans during the first one to five years of the loan, which has the
effect of reducing a borrower's payment during such years. In addition, most of
the Company's adjustable-rate mortgage loan agreements permit borrowers to
convert their adjustable-rate loans to fixed rate loans.
Adjustable-rate mortgage loans decrease the Company's exposure to risks
associated with changes in interest rates, but involve other risks because as
interest rates increase, borrowers' monthly payments increase, thus increasing
the potential for default. This risk has not had any adverse effect on the
Company to date, although no assurances can be made with respect to future
periods.
The Company also originates fixed-rate mortgage loans in order to provide a full
range of product to its customers. Such loans are originated usually under
terms, conditions, and documentation standards that make such loans eligible for
sale to the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal
National Mortgage Association ("FNMA") and other institutional investors. The
Company generally sells these loans at the time they are originated. Sales of
mortgage loans provide additional funds for lending and other business purposes
and have generally been under terms that do not provide for any recourse to the
Company by the purchaser.
During 2002, mortgage banking originated and sold on a service release basis 246
loans. Additionally, 123 loans were originated and retained in the Company's
portfolio.
10
The Company will continue to originate loans targeted at low and moderate income
home buyers, through the Affordable Housing Program, which will be retained in
its portfolio. Of the 123 loans originated, 76 were through the affordable
housing program that represented $11.9 million.
At December 2002, $55.5 million, including loans held for sale, of the Company's
loan portfolio consisted of loans on one-to-four family residences. At December
31, 2002, the Company's largest outstanding residential loan was $832,000.
Substantially all of the residential loans originated by the Company are secured
by properties located in the Company's primary market area. See "Originations,
Purchases and Sales of Loans".
Mortgage loans retained by the Company may have loan-to-value ratios of up to
100%. Mortgage loans exceeding an 80% loan-to-value ratio at the time of
origination may require private mortgage insurance to reduce the Company's
exposure to 80% or less of the appraised value of the underlying property. In
other instances, secondary financing may be provided to allow for a total loan
to value ratio of 100%. 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.
When the Company services loans for others, it is compensated for the
aforementioned services through retention of servicing fee from borrowers'
monthly payments. The Company also receives fees and interest income from
ancillary sources such as delinquency charges and float on escrow accounts and
other funds.
CONSUMER LENDING
Management believes that offering consumer loan products helps to expand and
create stronger ties to the Company's existing customer base. The Company offers
a variety of secured consumer loans, including direct automobile loans, second
mortgage loans (including home improvement loans), home equity lines, 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, which expands the market area.
The Company currently originates substantially all of its consumer loans in its
primary market area. At December 31, 2002, the Company's consumer loans totaled
$37.9 million or 7.00% 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 100% 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 outstanding balance of these types of loans was $28.8 million at December
31, 2002.
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. The outstanding balance in automobile
loans and other consumer loans at December 31, 2002 was $9.1 million. 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
11
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.
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 2002 and 2001, the Company did not purchase any mortgage backed securities or
residential loans. There were no mortgage-backed securities in the Company's
investment portfolio as of December 31, 2002. Plans in 2003 do not currently
include purchase of either 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, 2002, and 2001, there were approximately
$38.1 million and $66.0 million in the loan servicing portfolio.
The Company sold $54.1 million of its single family mortgage loan portfolio in
March 2001, in anticipation of falling rates and the risk of prepayments. This
reduced the Company's interest rate risk exposure on long term fixed rate assets
that had the ability to be refinanced by the borrower without penalty should
rates decline. The sale consisted of a $28.5 million sale of single use customer
mortgages and a $25.6 million sale of multi-use service customer mortgages.
Single use customer mortgages are customers with no other banking relationship
with the Company besides the mortgage loan. These loans were sold on a service
release basis, which means discontinuing the collection of principal and
interest payments, thereby giving up the rights of collecting servicing income.
Multi-service customer mortgages are customers with other banking relationship
with the Company, such as deposit account relationships and home equity lines of
credit. These multi-service customer mortgages were sold on a service retained
basis, which means continuing the collection of principal and interest payments
for the remaining term of the loan and the right to receive servicing income
from the loan purchaser. Proceeds from the sale were used to fund growth in the
commercial and multi-family portfolios.
In April 2002, the Company sold $20.1 million of its multi-family loan portfolio
which consisted of 5-year adjustable rate loans where the rate is fixed for the
first 5-year term and then reprice off the 5-year Treasury index for the next
five years. There was no gain or loss on the transaction and the loans were sold
at 7% pass-through until the next rate adjustment. The overall average gross
rate was 8.00%. The Company retains the servicing of the loans for a 0.25%
servicing fee and a 50/50 split of the prepayment fee negotiated for the life of
the contract.
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,
-----------------------
2002 2001 2000
---- ---- ----
(In Thousands)
Originations of portfolio loans
Adjustable rate
Commercial loans $ 21,136 $ 14,703 $ 13,698
One-to-four family 14,876 16,985 12,229
Multi-family 102,322 115,842 57,944
Commercial real estate 18,007 8,183 11,749
Construction loans 40,931 49,879 48,655
Consumer 347 4,139 2,437
--------- --------- ---------
Total adjustable rate 197,619 209,731 146,712
Fixed rate
Commercial loans 5,773 7,225 12,918
One-to-four family 1,966 1,655 247
Multi-family 20,678 3,413 632
Commercial real estate 14,597 15,120 2,633
Commercial leases -- -- --
Consumer 2,633 5,388 7,294
--------- --------- ---------
Total fixed rate 45,647 32,801 23,724
--------- --------- ---------
Total loans originated 243,266 242,532 170,436
Sales and repayments of loans and mortgage-backed
securities
Sales of mortgage-backed securities (2,060) (2,958) (11,948)
Sale of one-to-four family loans -- (54,140) --
Sale of multi-family loans (20,083) -- --
Principal repayments (198,599) (180,356) (129,601)
--------- --------- ---------
Total reductions (220,742) (237,454) (141,549)
Decrease in other items, net (576) (185) (165)
--------- --------- ---------
Net increase in loans and mortgage-backed securities $ 21,948 $ 4,893 $ 28,722
========= ========= =========
13
DELINQUENCY PROCEDURES
When a borrower fails to make a required payment on a loan, the Company attempts
to cure the delinquency 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 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 secured by real property are placed on non-accrual status when delinquent
more than 90 days and as deemed appropriate in the collection process. All other
consumer loans are charged off after 90 days.
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 4 $ 401 0.72% -- $ -- --% 4 $ 401 0.72%
Commercial real
estate 1 220 0.26 1 38 0.04 2 258 0.30
Multi-family -- -- -- -- -- -- -- -- --
Construction -- -- -- -- -- -- -- -- --
Commercial 3 674 1.19 3 1,415 2.49 6 2,089 3.68
Commercial leases -- -- -- 1 14 2.68 1 14 2.68
Consumer 4 30 0.08 -- -- -- 4 30 0.08
------ ------ ------ ------ ------ ------ ------ ------ ------
Total 12 $1,325 0.24% 5 $1,467 0.27% 17 $2,792 0.51%
====== ====== ====== ====== ====== ====== ====== ====== ======
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.
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 loan losses.
These loans are considered non-performing. If an asset or portion
14
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, 2002, the Company had categorized none of
its assets as Special Mention, $3.9 million as Substandard, and none as Doubtful
or Loss. The Company's classified assets consist of non-performing loans.
NON-PERFORMING ASSETS
The Company's financial statements are prepared on the accrual basis of
accounting, including the recognition of interest income on its loan portfolio,
unless a loan is placed on non-accrual status. Loans are placed on non-accrual
status when there are serious doubts regarding the collectibility of all
principal and interest due under the terms of the loans. Amounts received on
non-accrual loans generally are applied first to principal and then to interest
after all principal has been collected. It is the policy of the Company not to
renegotiate the terms of a loan because of a delinquent status. Rather, a loan
is generally transferred to non-accrual status if it is not in the process of
collection and is delinquent in payment of either principal or interest beyond
90 days.
Under Statement of Financial Accounting Standards No. 114 and No. 118, the
Company defined loans that will be individually evaluated for impairment to
include commercial loans and mortgage loans secured by commercial properties or
five-plus family residences that are in non-accrual status or were restructured.
All other smaller balance homogeneous loans are evaluated for impairment in
total.
The classification of a loan as impaired or non-accrual does not necessarily
indicate that the principal is uncollectible, in whole or in part. The Company
makes a determination as to collectibility on a case-by-case basis. The Company
considers both the adequacy of the collateral and the other resources of the
borrower in determining the steps to be taken to collect impaired or non-accrual
loans. The final determination as to the steps taken is made based upon the
specific facts of each situation. Alternatives that are typically considered to
collect impaired or non-accrual loans are foreclosure, collection under
guarantees, loan restructuring, or judicial collection actions.
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 loan losses to require an increase, such increase is reported
as a provision for loan 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.
At December 31, 2002, the Company had $3,934,000 of impaired loans. The Company
had three commercial real estate loans to related borrowers totaling $3,016,000
that were put to non-accrual status in the third quarter of 2002. The Company
has begun the foreclosure process and is having new appraisals performed on the
properties. As of December 31, 2002, the Company had allocated $300,000 of the
allowance for loan losses to these impaired loans. Subsequently, in the first
quarter of 2003, the Company charged off the $300,000. A $1,426,000 multi-family
loan was classified as non-accrual in June 2002. The Company charged-off
$159,000 of this loan during the second quarter of 2002. A subsequent payment
was made on this loan, which now has a balance of $918,000. The average balance
of impaired loans during the year was $4,352,000. Interest income recognized on
impaired loans was not material in 2002.
The $661,000 other real estate owned is an undeveloped commercial property in
Chicago. The loan balance was $780,000 and the Company charged off $118,000 on
the loan during 2001. The property was sold in February 2003 and the Company
incurred $57,000 of expenses. The loss incurred on the sale was $27,000.
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.
December 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(Dollars in Thousands)
Non-accruing loans
One-to-four family $ 530 $ 668 $ 425 $766 $ 996
Commercial real estate loans 3,016 1,540 1,843 -- --
Multi-family loans 918 -- -- -- --
Construction loans -- 48 -- -- --
Commercial loans -- -- 29 -- --
Commercial leases -- -- -- -- --
Consumer 35 43 62 -- 25
------ ------ ------ ---- ------
Total 4,499 2,299 2,359 766 1,021
Accruing loans delinquent 90 days or more
One-to-four family -- 119 -- -- --
Commercial real estate loans -- -- 542 -- --
Multi-family loans -- -- -- -- --
Construction loans -- -- 2,300 -- --
Commercial loans 1,416 100 298 -- --
Commercial leases 14 21 -- -- --
Consumer 38 -- -- -- --
------ ------ ------ ---- ------
Total 1,468 240 3,140 -- --
------ ------ ------ ---- ------
Total non-performing loans 5,967 2,538 5,499 766 1,021
------ ------ ------ ---- ------
Other real estate owned 661 661 -- -- --
------ ------ ------ ---- ------
Total non-performing assets $6,628 $3,200 $5,499 $766 $1,021
====== ====== ====== ==== ======
Total non-performing loans
to net loans 1.12% 0.50% 1.10% 0.17% 0.25%
====== ====== ====== ==== ======
Total non-performing loans
as percentage of assets 0.98% 0.43% 0.94% 0.14% 0.19%
====== ====== ====== ==== ======
Total non-performing assets
as percentage of assets 1.09% 0.55% 0.94% 0.14% 0.19%
====== ====== ====== ==== ======
Management has considered the Company's non-performing loans in establishing its
allowance for loan losses.
As of December 31, 2002, there were no other loans that were not included in 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. As of March 27,
2003, loans delinquent 90 days or more and still accruing totaling $675,000 had
been made current.
16
ALLOWANCE FOR LOAN LOSSES
The Company recognizes that credit losses will be experienced and the risk of
loss will vary with, among other things, general economic conditions; the type
of loan being made; the creditworthiness of the borrower over the term of the
loan; and in the case of a collateralized loan, the quality of the collateral
for such loan. The allowance for loan losses represents the Company's estimate
of the allowance necessary to provide for probable incurred losses in the
portfolio. In making this determination, the Company analyzes the ultimate
collectibility of the loans in its portfolio, incorporating feedback provided by
internal loan staff, an independent loan review function, and information
provided by examinations performed by regulatory agencies. The Company makes an
ongoing evaluation as to the adequacy of the allowance for loan losses.
On a quarterly basis, management of the Bank meets to review the adequacy of the
allowance for loan 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.).
The analysis of the allowance for loan losses is comprised of three components:
specific credit allocation, general portfolio allocation, and subjective
determined allocation. The specific credit allocation includes a detailed review
of the credit in accordance with SFAS 114 and 118 and an allocation is made
based on this analysis. The general portfolio allocation consists of an assigned
reserve percentage based on the credit rating of the loan. The subjective
portion is determined based on loan history and the Company's evaluation of
various factors including future economic and industry outlooks. In addition the
subjective portion of the allowance is influenced by current economic conditions
and trends in the portfolio including delinquencies and impairments, as well as
changes in the composition of the portfolio.
The allowance for loan losses is based on estimates, and ultimate losses will
vary from current estimates. These estimates are reviewed monthly, and as
adjustments, either positive or negative, become necessary, a corresponding
increase or decrease is made in the provision for loan losses. During 2002, 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, commercial real estate and
commercial loan portfolios. The methodology used to determine the adequacy of
the allowance for loan losses is consistent with prior years.
17
The following table sets forth an analysis of the Company's allowance for loan
losses:
Year Ended December 31,
----------------------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(Dollars in Thousands)
Balance at beginning of year $6,547 $5,655 $4,833 $4,312 $3,977
Charge-offs
One-to-four family 49 -- 26 107 38
Commercial real estate loans 240 404 -- -- --
Multi-family loans 159 45 -- -- --
Construction loans -- -- -- -- --
Commercial loans 19 29 7 399 --
Commercial leases -- -- -- -- --
Consumer 147 269 205 195 1,355
------ ------ ------ ------ ------
Total charge-offs 614 747 238 701 1,393
Recoveries
One-to-four family -- -- -- -- --
Commercial real estate loans -- -- -- -- --
Multi-family loans -- -- -- -- --
Construction loans -- -- -- -- --
Commercial loans 10 -- -- -- --
Commercial leases -- -- -- -- --
Consumer 43 37 50 90 161
------ ------ ------ ------ ------
Total Recoveries 53 37 50 90 161
------ ------ ------ ------ ------
Net charge-offs 561 710 188 611 1,232
------ ------ ------ ------ ------
Additions charged to operations 1,053 1,602 1,010 1,132 1,567
------ ------ ------ ------ ------
Balance at end of year $7,039 $6,547 $5,655 $4,833 $4,312
====== ====== ====== ====== ======
Ratio of net charge-offs during the
year to average loans outstanding
during the year 0.11% 0.14% 0.04% 0.15% 0.37%
====== ====== ====== ====== ======
Ratio of allowance to non-performing loans 1.18x 2.58x 1.03x 6.31x 4.22x
====== ====== ====== ====== ======
Because some loans may not be repaid in full, an allowance for loan losses is
recorded. Increases to the allowance are recorded by a provision for loan 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 probable incurred 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. 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.
18
The distribution of the Company's allowance for loan losses at the dates
indicated is summarized as follows:
(Dollars in Thousands)
December 31,
------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Percent Percent Percent Percent Percent
of of of of of
Loans Loans Loans Loans Loans
Allow- in Each Allow- in Each Allow- in Each Allow- in Each Allow- in Each
ance Category ance Category ance Category ance Category ance Category
for to for to for to for to for to
Loan Total Loan Total Loan Total Loan Total Loan Total
Losses Loans Losses Loans Losses Loans Losses Loans Losses Loans
(1) (2) (3)
One-to-four family loans $ 167 10.24% $ 178 11.56% $ 364 23.98% $ 390 27.91% $ 387 37.94%
Commercial loans and
leases 1,165 10.53 1,180 9.42 1,064 8.38 738 8.41 412 10.64
Commercial real estate 1,692 15.61 1,588 15.41 1,586 15.70 1,472 15.77 1,335 16.43
Construction loans 1,088 10.07 1,326 11.44 966 9.57 924 9.90 811 9.98
Multi-family loans 2,512 46.55 1,886 43.19 1,065 32.09 878 27.03 807 13.70
Consumer loans 415 7.00 389 8.98 610 10.28 431 10.98 560 11.31
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $7,039 100.00% $6,547 100.00% $5,655 100.00% $4,833 100.00% $4,312 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Note:
(1) In 2002, the Company re-allocated $238,000 from the allowance on
construction loans to allowance for losses on multi-family loans.
Construction loans decreased $4.3 million in 2002.
(2) In 2001, the Company re-allocated $186,000 from the allowance on
one-to-four family loans to allowance for losses on commercial real estate
loans. The Company sold $54.5 million of its one-to-four family loans in
March 2001.
(3) 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.
(4) 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.
Management regularly reviews its loan portfolio and charge-off experience to
maintain the allowance at a level management feels is adequate, although there
can be no assurance that actual losses will not exceed estimated amounts.
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,
-----------------------
2002 2001 2000
---- ---- ----
Fair % of Fair % of Fair % of
Value Total Value Total Value Total
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
U.S. government agency $ 33,040 67.20% $ 31,931 61.21% $ 30,459 53.26%
Marketable equity securities 2,389 4.86 2,258 4.33 1,476 2.58
Municipal bonds 6,060 12.32 6,708 12.86 9,302 16.27
FHLMC mortgage-backed
and related -- -- 3,948 7.57 6,767 11.83
FNMA mortgage-backed
and related -- -- -- -- 2,314 4.05
-------- -------- -------- -------- -------- --------
Subtotal 41,489 84.38 44,845 85.97 50,318 87.99
FHLB stock 7,212 14.67 6,850 13.13 6,397 11.19
FRB stock 469 0.95 469 0.90 469 0.82
-------- -------- -------- -------- -------- --------
Total securities
and stock $ 49,170 100.00% $ 52,164 100.00% $ 57,184 100.00%
======== ======== ======== ======== ======== ========
Average remaining life
of non-mortgage-backed
securities 2.34 years 2.29 years 2.58 years
The composition and contractual maturities of the securities portfolio at
December 31, 2002 excluding 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. government agency $2,504 $ 30,536 $ -- $ -- $ 33,040
Municipal bonds 3,386 2,674 -- -- 6,060
------ ---------- ---------- ---------- ----------
Total securities $5,890 $ 33,210 $ -- $ -- $ 39,100
====== ========== ========== ========== ==========
Weighted average yield 4.42% 4.06% --% --% 4.11%
====== ========== ========== ========== ==========
Of the $33.0 million U.S. Government Agency investments at December 31, 2002,
$23.5 million had call features within 2 years from purchase. If called, the
average remaining life, including municipal bonds would be 0.76 years.
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, loan
participations, 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.
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, 2002,
the Company had outstanding borrowings of $62.2 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 that the Company used during 2002 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), High Yield 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 liquidity position; (iii) the rates offered
by competing institutions; and (iv) its internal costs of funds. 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 CoVest High Yield Account, a high-rate
money market account, was introduced in March 2000. It is a tiered account that
indexes its rate to the 91-day Treasury Bill auction. The High Yield Money
Market Account decreased by $28.5 million in 2002. The Company believes that the
decline was due to the decline in the 91-day Treasury Bill rate to which the
account is indexed. The Company also believes that the decrease in the High
Yield Money Market index rate caused savings deposits to increase, as the rate
remained at a fixed 2.50% until October 1, 2002. On October 1, 2002, the Company
implemented relationship pricing on savings accounts where savings accounts with
related checking accounts earn 2.25%, while non-relationship savings accounts
earn 1.50%. As of December 31, 2002, relationship savings amounts totaled $74.1
million. The floor set on the High Yield Money Market Account was 1.25% at
inception. On January 30, 2003, the floor rate was decreased to 1.00% to be in
line with the 91-day Treasury Bill rate to which the High Yield Money Market
Account is indexed.
The Company also offers services to make its checking accounts more desirable,
such as Telephone Banking and debit cards, both of which have been extensively
utilized by customers. In 1999, the Company introduced Gold Star Checking, a
high-rate 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 and a CoVest High Yield money market account, and
provides additional benefits and services to the customer. Focus continues on
these products and services.
21
In November 2000, the Company launched an Internet Banking and Bill Payment
solution for its retail customers and an Internet Cash Management solution for
its commercial customers. Over 1,200 Internet users were added in 2001 with an
additional 1,000 users in 2002, reaching a 16% penetration of the Bank's
depositor base and a 24% penetration of the Bank's checking account base. The
Bank also had success with Internet Bill Payment in 2002, achieving an18%
penetration of its overall Internet customer base.
Also adding to the convenience-driven services already utilized by CoVest
customers such as debit cards and Telephone Banking, during 2001 the Company
joined STARsf, an alliance of financial institutions that belong to the STAR
network that offer each other's customers surcharge-free ATM transactions.
CoVest customers can now use over 500 surcharge-free ATMs throughout
Chicagoland. In addition to joining STARsf, the Company also added a fourth ATM
in 2001 to its own ATM network, a drive-up machine located at the Company's Des
Plaines branch.
The Company continues to build its volume of non-interest and interest-bearing
checking accounts along with complementary deposit products and services such as
direct deposit and debit cards. The checking account is a core account of the
community bank. From the Company's perspective, it also helps improve
non-interest income and will help to improve the Company's net interest margin.
The Company offers promotions to attract new checking accounts and provides
additional services, such as Internet Banking and Telephone Banking; to make
these accounts more desirable in the marketplace.
Another service added to the Company's robust set of complementary deposit
products in 2001 was check imaging. Check imaging leverages technology to
provide laser-copied images of the checks that a customer writes in each account
cycle's monthly statement. CoVest customers can now choose either check
truncation, check imaging, or check return. The Company continues to use
technology to provide its customers with added convenience and flexibility.
In April 2001, the Company introduced a revised checking account product set
that included a new account, CoVest Foundation Checking. The account structure
of Foundation Checking allows the Company to do business with customers that may
not otherwise be able to obtain a checking account due to an imperfect credit
history or other financial woes. As a true community bank, it's important that
the Company offers a broad range of financial solutions designed to meet a wide
range of needs in a diverse marketplace.
The Company also introduced the CoVest Community Interest Checking Account in
April 2001. The Company donates $25 to a local charity of the customer's
choosing every time a Community Interest account is opened. As a result of the
Company's community orientation and success with this new account, over $2,500
was donated to six local charities, above and beyond the Company's standard
donations and contributions.
In December 2001, the Company unveiled a relationship pricing strategy for its
Home Equity portfolio. Recognizing the value of a complete customer
relationship, the Company discounts its competitive Home Equity rate 25 basis
points when a Home Equity customer opens one of six CoVest checking accounts
with direct deposit. Another 25 basis points discount can be obtained if the
customer chooses to open any other deposit account, including the CoVest High
Yield Account, a Savings account, or a Certificate of Deposit. A maximum
discount of 50 basis points will be awarded per customer, and the Company's Home
Equity rate will not go below 5.00%. This relationship pricing strategy supports
the Company's business plan of building non-interest and interest-bearing
checking account volume.
The Company also solicits deposits from outside its primary market area. As of
December 31, 2002, purchased money deposits totaled $66.9 million, up $21.1
million from December 31, 2001. The Company will continue to use this funding
source in 2003 to augment funding requirements and match liability maturities
when those funds cannot be raised from our local market.
22
The following table sets forth the deposit flows experienced by the Company
during the periods indicated:
Year Ended December 31,
-----------------------
(Dollars in Thousands)
2002 2001 2000
----------- ----------- -----------
Deposit balance at January 1 $ 456,002 $ 451,725 $ 398,055
Deposits 1,958,011 1,827,422 1,314,136
Withdrawals (1,949,891) (1,835,669) (1,282,156)
Interest credited 9,485 12,524 21,690
----------- ----------- -----------
Deposit balance at December 31 $ 473,607 $ 456,002 $ 451,725
=========== =========== ===========
Net increase/(decrease) $ 17,605 $ 4,277 $ 53,670
=========== =========== ===========
Percent increase/(decrease) 3.86% 0.95% 13.48%
=========== =========== ===========
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,
-----------------------
2002 2001 2000
---- ---- ----
% of % of % of
Amount Total Amount Total Amount Total
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Checking accounts $ 68,536 14.47% $ 60,332 13.23% $ 50,853 11.26%
High Yield money market 85,372 18.03 113,864 24.98 119,767 26.51
Saving accounts 94,885 20.03 52,141 11.43 42,906 9.50
-------- -------- -------- -------- -------- --------
Total non-certificates 248,793 52.53 226,337 49.64 213,526 47.27
Certificates of deposit
0.00 - 2.99% 110,026 23.23 68,338 14.99 10 --
3.00 - 3.99% 64,965 13.72 36,363 7.97 -- --
4.00 - 4.99% 21,504 4.54 40,224 8.82 4,704 1.05
5.00 - 5.99% 8,478 1.79 30,396 6.67 50,976 11.28
6.00 - 6.99% 19,336 4.08 50,043 10.97 169,793 37.59
7.00 - 7.99% 505 0.11 4,301 0.94 12,716 2.81
8.00 - 8.99% -- -- -- -- -- --
9.00 - 9.99% -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total certificates 224,814 47.47 229,665 50.36 238,199 52.73
-------- -------- -------- -------- -------- --------
Total deposits $473,607 100.00% $456,002 100.00% $451,725 100.00%
======== ======== ======== ======== ======== ========
23
The following table shows rate and maturity information for the Company's
certificates of deposit as of December 31, 2002. The table below details the
scheduled maturities of certificates of deposit:
2003 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
(In Thousands)
0.00 - 2.99% $ 103,040 $ 6,024 $ 689 $ 91 $ 182 $ -- $ 110,026
3.00 - 3.99% 38,230 19,617 2,033 4,872 213 -- 64,965
4.00 - 4.99% 5,056 6,561 5,145 2,978 1,628 136 21,504
5.00 - 5.99% 5,992 1,577 586 235 88 -- 8,478
6.00 - 6.99% 14,328 1,068 3,298 267 256 118 19,336
7.00 - 7.99% 505 -- -- -- -- -- 505
----------- --------- ---------- ---------- ---------- ---------- -----------
$ 167,151 $ 34,847 $ 11,751 $ 8,443 $ 2,367 $ 254 $ 224,814
=========== ========= ========== ========== ========== ========== ===========
The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of December 31, 2002:
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 $ 32,873 $ 19,972 $ 36,861 $ 25,220 $ 114,926
Certificates of deposit of $100,000 or more(1) 29,028 17,250 31,168 32,442 109,888
---------- ---------- ---------- ---------- -----------
Total certificates of deposit $ 61,901 $ 37,222 $ 68,029 $ 57,662 $ 224,814
========== ========== ========== ========== ===========
(1) Includes "Jumbo" certificates of $1,880,000. "Jumbo" certificates are a
deposit product of over $100,000 that 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".
At December 31, 2002, the Company had $66.9 million of purchased money deposits
with staggered maturities ranging from one month to four years. Purchased money
deposits issued in 2002 had all inclusive rates ranging from 1.44% to 4.30%.
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 a 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 $62.2 million of FHLB advances outstanding at December 31, 2002, secured by
residential mortgage loans, multi-family loans and various securities. The
maturities of FHLB advances outstanding ranged from one day to up to 10 years. A
$10.0 million advance taken in 1998 at 4.95%, has a maturity date of 2008 and
has a quarterly call feature that started on April 2001. This advance has yet to
be called. A $5.0 million advance taken in 2001 at 4.30%, has a maturity date of
2006 and is subject to a one-time call in July 2003. The Company had $3.2
million in FHLB overnight borrowing as of December 31, 2002. All FHLB term
advances have fixed rates.
24
The following table sets forth the maximum month-end balance, average balance,
and weighted average rates of borrowings for the periods indicated:
2002 2001 2000
------- ------- -------
(Dollars in Thousands)
Maximum month-end balances
FHLB advances $72,000 $71,000 $89,000
Securities sold under repurchase agreements 8,965 11,167 10,432
Other 26,888 12,652 24,461
Average balances
FHLB advances 63,195 52,882 66,344
Securities sold under repurchase agreements 6,605 8,433 8,071
Other 4,000 4,646 4,313
Weighted average rates at end of year
FHLB advances 3.89% 4.63% 6.27%
Securities sold under repurchase agreements 1.54 2.20 6.03
Other 1.09 2.10 6.44
25
SUPERVISION AND REGULATION
GENERAL
Financial institutions, their holding companies and their affiliates are
extensively regulated under federal and state law. As a result, the growth and
earnings performance of the Company may be affected not only by management
decisions and general economic conditions, but also by the requirements of
federal and state statutes and by the regulations and policies of various bank
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") and the Federal Deposit Insurance Corporation (the "FDIC").
Furthermore, taxation laws administered by the Internal Revenue Service and
state taxing authorities and securities laws administered by the Securities and
Exchange Commission (the "SEC") and state securities authorities have an impact
on the business of the Company. The effect of these statutes, regulations and
regulatory policies may be significant, and cannot be predicted with a high
degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions regulate, among other things, the scope of business, the kinds and
amounts of investments, reserve requirements, capital levels relative to
operations, the nature and amount of collateral for loans, the establishment of
branches, mergers and consolidations and the payment of dividends. This system
of supervision and regulation establishes a comprehensive framework for the
respective operations of the Company and its subsidiaries and is intended
primarily for the protection of the FDIC insured deposits and depositors of the
Bank, rather than shareholders.
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, nor does it
restate all of the requirements of those statutes, regulations and regulatory
policies that are described. As such, the following is qualified in its entirety
by reference to applicable law. Any change in applicable statutes, regulations
or regulatory policies may have a material effect on the business of the Company
and its subsidiaries.
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 of 1956,
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.
ACQUISITIONS, ACTIVITIES AND CHANGE IN CONTROL
The primary purpose of a bank holding company is to control and manage banks.
The BHCA generally requires the prior approval of the Federal Reserve for any
merger involving a bank holding company or any acquisition by a bank holding
company of another bank or bank holding company. Subject to certain conditions
(including 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. In approving interstate acquisitions, 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
that 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 generally prohibits the Company from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any company that 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 ...
26
as to be a proper incident thereto." This authority would permit the Company to
engage in a variety of banking-related businesses, including the operation of a
thrift, consumer finance, equipment leasing, the operation of a computer 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.
Additionally, bank holding companies that meet certain eligibility requirements
prescribed by the BHCA and elect to operate as financial holding companies may
engage in, or own shares in companies engaged in, a wider range of nonbanking
activities, including securities and insurance underwriting and sales, merchant
banking and any other activity that the Federal Reserve, in consultation with
the Secretary of the Treasury, determines by regulation or order is financial in
nature, incidental to any such financial activity or complementary to any such
financial activity and does not pose a substantial risk to the safety or
soundness of depository institutions or the financial system generally. As of
the date of this filing, the Company has neither applied for nor received
approval to operate as a financial holding company.
Federal law also prohibits any person or company from acquiring "control" of an
FDIC-insured depository institution or its holding company without prior notice
to the appropriate federal bank regulator. "Control" is conclusively presumed to
exist upon the acquisition of 25% or more of the outstanding voting securities
of a bank or bank holding company, but may arise under certain circumstances at
10% ownership.
CAPITAL REQUIREMENTS
Bank holding companies are required to maintain minimum levels of capital in
accordance with Federal Reserve capital adequacy guidelines. If capital levels
fall below the minimum required 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: (i) a risk-based
requirement expressed as a percentage of total assets weighted according to
risk; and (ii) 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%, and a minimum ratio of Tier 1 capital to total
risk-weighted assets of 4%. 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 loan servicing rights and purchased
credit card relationships). Total capital consists primarily of Tier 1 capital
plus certain other debt and equity instruments that 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, 2002, the Company had
regulatory capital in excess of the Federal Reserve's minimum requirements.
DIVIDEND PAYMENTS
The Company's ability to pay dividends to its shareholders may be affected by
both general corporate law considerations and policies of the Federal Reserve
applicable to bank holding companies. As a Delaware corporation, the Company is
subject to the limitations of the Delaware General Corporation Law (the "DGCL").
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, policies of
the Federal Reserve caution that a bank holding company should not pay cash
dividends that exceed its net income or that 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
27
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.
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
and the Federal Home Loan Bank System. As a national bank, the Bank is subject
to the examination, supervision, reporting and enforcement requirements of the
OCC, the chartering authority for national banks. The FDIC, as administrator of
the SAIF, also has regulatory authority over the Bank.
DEPOSIT INSURANCE
As a 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, 2002, SAIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 2003, SAIF assessment rates will continue to range from 0% of
deposits to 0.27% of deposits.
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 until the final maturity of
such obligations in 2019. These FICO assessments are in addition to amounts
assessed by the FDIC for deposit insurance. During the year ended December 31,
2002, the FICO assessment rate for BIF and SAIF members was approximately 0.02%
of deposits.
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 that 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, 2002, the Bank
paid supervisory assessments to the OCC totaling $135,861.
CAPITAL REQUIREMENTS
Banks are generally required to maintain capital levels in excess of other
businesses. The OCC has established the following minimum capital standards for
national banks, such as the Bank: (i) 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 (ii) a
risk-based capital requirement consisting of a minimum ratio of total capital to
total risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total
risk-weighted assets of 4%. For purposes of these capital standards, the
components of Tier 1 capital and total capital are the same as those for bank
holding companies discussed above.
28
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, 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.
Further, federal law and regulations provide various incentives for financial
institutions to maintain regulatory capital at levels in excess of minimum
regulatory requirements. For example, a financial institution that is
"well-capitalized" may qualify for exemptions from prior notice or application
requirements otherwise applicable to certain types of activities and may qualify
for expedited processing of other required notices or applications.
Additionally, one of the criteria that determines a bank holding company's
eligibility to operate as a financial holding company is a requirement that all
of its financial institution subsidiaries be "well-capitalized." Under the
regulations of the OCC, in order to be "well-capitalized" a financial
institution must maintain a ratio of total capital to total risk-weighted assets
of 10% or greater, a ratio of Tier 1 capital to total risk-weighted assets of 6%
or greater and a ratio of Tier 1 capital to total assets of 5% or greater.
Federal law also 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 "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: (i)
requiring the institution to submit a capital restoration plan; (ii) limiting
the institution's asset growth and restricting its activities; (iii) requiring
the institution to issue additional capital stock (including additional voting
stock) or to be acquired; (iv) restricting transactions between the institution
and its affiliates; (v) restricting the interest rate the institution may pay on
deposits; (vi) ordering a new election of directors of the institution; (vii)
requiring that senior executive officers or directors be dismissed; (viii)
prohibiting the institution from accepting deposits from correspondent banks;
(ix) requiring the institution to divest certain subsidiaries; (x) prohibiting
the payment of principal or interest on subordinated debt; and (xi) ultimately,
appointing a receiver for the institution.
As of December 31, 2002: (i) the Bank was not subject to a directive from the
OCC to increase its capital to an amount in excess of the minimum regulatory
capital requirements; (ii) the Bank exceeded its minimum regulatory capital
requirements under OCC capital adequacy guidelines; and (iii) the Bank was
"well-capitalized," as defined by OCC regulations.
DIVIDENDS
The primary source of funds for the Company is dividends from the Bank. Under
the National Bank Act, 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 that, 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 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, 2002. Further, the
Bank may not pay dividends in an amount that would reduce its capital below the
amount required for the liquidation account established by the Bank in
connection with its conversion from the mutual to the stock form of ownership in
1992. As of December 31, 2002, approximately $395,000 was available to be paid
as dividends by the Bank. Notwithstanding the availability of funds for
dividends, however, the 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, on investments in the stock or other securities of the
Company and the acceptance of the stock or other securities of the Company as
collateral for loans made by the Bank. Certain limitations and reporting
requirements are also placed on extensions of credit by the Bank to its
directors and officers, to the directors and officers of the Company, to
principal
29
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 who is a director or officer of the
Company or the Bank or a principal stockholder of the Company may obtain credit
from banks with which the Bank maintains correspondent relationships.
SAFETY AND SOUNDNESS STANDARDS
The federal banking agencies have adopted guidelines that 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.
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, subject to
OCC approval. 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.
State and national banks are allowed to establish interstate branch networks
through acquisitions of other banks, subject to certain conditions, including
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 only if specifically authorized by
state law. Illinois permits interstate mergers subject to certain conditions,
including a condition requiring an Illinois bank involved in an interstate
merger to have been in existence and continuous operation for more than five
years.
FINANCIAL SUBSIDIARIES
Under Federal law and OCC regulations, national banks are authorized to engage,
through "financial subsidiaries," in any activity that is permissible for a
financial holding company and any activity that the Secretary of the Treasury,
in consultation with the Federal Reserve, determines is financial in nature or
incidental to any such financial activity, except (i) insurance underwriting,
(ii) real estate development or real estate investment activities (unless
otherwise 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 Bank has neither applied for nor received approval to
establish any financial subsidiaries.
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 $42.1 million or less, the reserve requirement
is 3% of total transaction accounts; and for transaction accounts aggregating in
excess of $42.1 million, the reserve requirement is $1.083 million plus 10% of
the aggregate amount of total transaction accounts in excess of $42.1 million.
The first $6.0 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.
30
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
J. Stuart Boldry, Jr. Executive Vice President Executive Vice President, Retail Banking
Barbara A. Buscemi Executive Vice President Executive Vice President, Human Resources
Joseph J. Gillings Executive Vice President Executive Vice President, Commercial
Banking
Michael A. Sykes Executive Vice President Executive Vice President, Real Estate
Lending
James L. Roberts, age 60, was elected as the Company's President and Chief
Executive Officer on January 20, 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 53, 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 30 years of financial management and treasury
operations experience within the commercial banking environment.
J. Stuart Boldry, Jr., age 47, was named Executive Vice President of the Company
and the Bank in December 1999. In September 2000 he was promoted to managing
Retail Banking. Prior to joining the Bank, Mr. Boldry had been a Senior Vice
President at First Commerce Corporation, a commercial bank in Louisiana from
1995 to 1999. Mr. Boldry has over 20 years of commercial banking experience.
Barbara A. Buscemi, age 48, was named Executive Vice President of the Company
and the Bank in October 2001. 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 61, was named Executive Vice President, Commercial
Banking of the Company and the Bank in October 2001. 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.
Michael A. Sykes, age 39, was named Executive Vice President, Real Estate
Lending of the Company and the Bank in October 2001. 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
31
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,
2002, this property had 19,575 square feet and a net book value of approximately
$2.9 million. The Company also owns the land for its employee parking lot
located at 761 Graceland Street, Des Plaines, Illinois.
In 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, 2002, the net book
value of the land and the building was approximately $2.3 million.
In 1995, the Company opened a 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, 2002, the net book value of the land and the building
was approximately $2.6 million.
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, 2002.
32
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
As of March 27 2003, there were approximately 600 holders of record of CoVest
Bancshares, Inc. Common Stock, and an estimated 1,400 holders of its stock in
"street name."
The Common Stock of CoVest Bancshares, Inc. is listed for quotation on the
Nasdaq National Market System under the symbol COVB.
On November 4, 2002, the Company announced that it had entered into the Merger
Agreement with Midwest Banc that, if approved by the Company's stockholders,
will result in the Company being merged with and into Midwest Banc.
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.
2002 Dividend High Low 2001 Dividend High Low
---- -------- ---- --- ---- -------- ---- ---
1st Qtr. $.08 $21.28 $ 18.15 1st Qtr. $.08 $14.94 $ 11.19
2nd Qtr. .08 22.55 20.15 2nd Qtr. .08 15.64 12.75
3rd Qtr. .08 22.49 20.51 3rd Qtr. .08 18.24 15.01
4th Qtr. .08 28.55 20.00 4th Qtr. .08 18.72 16.70
Year end closing price = $28.02 Year end closing price = $18.70
The Annual Meeting of Stockholders of CoVest Bancshares, Inc. will be held at
9:00 a.m. on Tuesday, May 20, 2003 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
This information is also available in the Investor Relations section of our
website at www.covestbanc.com, or you can go directly to
www.covestbanc.com/aboutus.htm.
33
The following companies make a market in COVB Common Stock:
Bear, Stearns & Co., Inc. Keefe, Bruyette & Woods, Inc.
Dain Rauscher, Inc. Knight Securities, LP
First Tennessee Securities Corp. Sandler, O'Neill & Partners, L.P.
Goldman, Sachs & Co. Stifel, Nicolaus & Co., Inc.
Howe, Barnes Investments, Inc.
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:
Computershare Investor Services, LLC
P.O. Box A3504
Chicago, Illinois 60690-3504
(312) 360-5106
www.computershare.com
Corporate Office: CoVest Bancshares, Inc.
749 Lee Street
Des Plaines, Illinois 60016
(847)294-6500
Corporate Counsel: Barack Ferrazzano Kirschbaum
Perlman & Nagelberg LLC
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
CoVest Banc Branch Offices: 749 Lee Street
Des Plaines, Illinois 60016
770 W. Dundee Road
Arlington Heights, Illinois 60004
2601 W. Schaumburg Road
Schaumburg, Illinois 60194
Phone Number: (847) 294-6500
Internet address: www.covestbanc.com
34
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL INFORMATION
As of December 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(In Thousands)
Selected financial condition data
Total assets $ 608,921 $ 585,729 $ 585,792 $ 568,496 $ 548,697
Loans receivable, net 535,024 509,620 500,431 462,697 402,329
Total securities 49,170 52,164 57,184 76,990 88,017
Non-interest earning assets 24,710 23,924 28,156 18,192 18,674
Deposits 473,607 456,002 451,725 398,055 364,535
Borrowings 74,370 73,425 74,479 114,004 126,755
Non-interest bearing liabilities 12,358 11,151 11,554 10,163 10,456
Stockholders' equity 48,586 45,151 48,034 46,274 46,951
Selected operations data
Total interest income $ 36,561 $ 42,843 $ 43,827 $ 38,561 $ 40,943
Total interest expense 15,290 22,845 26,532 22,225 24,739
----------- ----------- ----------- ----------- -----------
Net interest income 21,271 19,998 17,295 16,336 16,204
Provision for loan losses 1,053 1,602 1,010 1,132 1,567
----------- ----------- ----------- ----------- -----------
Net interest income after provision 20,218 18,396 16,285 15,204 14,637
Total non interest income 4,943 4,245 2,892 4,037 5,579
Total non interest expense 14,659 13,581 12,122 13,259 14,245
----------- ----------- ----------- ----------- -----------
Income before income taxes 10,502 9,060 7,055 5,982 5,971
Income tax provision 3,906 3,291 2,505 2,047 2,100
----------- ----------- ----------- ----------- -----------
Net income $ 6,596 $ 5,769 $ 4,550 $ 3,935 $ 3,871
=========== =========== =========== =========== ===========
35
SELECTED FINANCIAL RATIOS AND OTHER DATA
Year Ended December 31; 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Performance ratios:
Return on assets (ratio of net income to
average total assets) 1.10% 0.99% 0.80% 0.72% 0.67%
Interest rate spread information
Average during year 3.32% 3.00% 2.55% 2.70% 2.53%
End of year 3.31% 3.45% 2.80% 2.60% 2.67%
Interest margin 3.70% 3.58% 3.18% 3.18% 2.96%
Ratio of operating expenses to average
total assets 2.45% 2.33% 2.14% 2.43% 2.47%
Efficiency ratio 55.92% 56.02% 60.05% 65.08% 65.40%
Ratio of net interest income to non-interest
expenses 1.45x 1.47x 1.43x 1.23x 1.14x
Basic earnings per share $1.93 $1.54 $1.14 $0.96 $0.92
Diluted earnings per share $1.84 $1.50 $1.12 $0.93 $0.87
Return on stockholders' equity (ratio of
net income to average total equity) 14.15% 12.05% 9.75% 8.49% 8.15%
Dividend payout ratio 16.95% 20.66% 28.15% 33.70% 35.55%
Asset quality ratios:
Non-performing assets to total assets at
end of year 1.09% 0.55% 0.94% 0.14% 0.19%
Allowance for loan losses to
non-performing loans 1.18x 2.58x 1.03x 6.31x 4.22x
Capital ratios:
Stockholders' equity to total assets at
end of year 7.98% 7.71% 8.20% 8.14% 8.56%
Average stockholders' equity to
average assets 7.79% 8.20% 8.23% 8.49% 8.25%
Ratio of average interest-earning assets to
average interest-bearing liabilities 1.14x 1.14x 1.13x 1.11x 1.10x
Other data
Facilities
Number of full-service offices 3 3 3 3 3
Number of ATMs 4 4 3 4 4
36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FINANCIAL OVERVIEW
The Company's assets were at $608.9 million as of December 31, 2002, up 4%
compared to $585.7 million as of December 31, 2001. Loans receivable represented
89% of total assets while securities represented 8.1% as of December 31, 2002
compared to 88.1% and 8.9% as of December 31, 2001. Total loans increased $25.9
million while investments decreased $3.0 million. Commercial loans increased
$9.7 million, or 21%, multi-family loans increased $29.6 million, or 13%, and
commercial real estate loans increased $5.1 million, or 6%. In April 2002, the
Company sold $20.1 million of its multi-family loan portfolio which consisted of
5-year adjustable rate loans where the rate is fixed for the first 5-year term
and then reprice off the 5-year Treasury index for the next five years. There
was no gain or loss on the transaction and the loans were sold at 7%
pass-through until the next rate adjustment. The overall average gross rate was
8.00%. The Company retains the servicing of the loans for a 0.25% servicing fee
and a 50/50 split of the prepayment fee negotiated for the life of the contract.
Construction loans decreased $4.3 million, or 7%, mortgage loans decreased $4.1
million, or 7%, and consumer loans decreased $8.4 million, or 18%.
Total deposits (including purchased money deposits) increased $17.6 million or
4% in 2002. The increase of $42.7 million in savings accounts was offset by the
decrease in the High Yield Money Market account of $28.5 million and
certificates of deposits of $26.0 million. Purchased money deposits increased
$21.2 million.
For the year ended December 31, 2002, the Company earned $6,596,000, increase of
$827,000, or 14% for the $5,769,000 earned in 2001.
STOCK REPURCHASE PROGRAM AND DIVIDENDS
The Company paid quarterly dividends during 2002 of $.08 per share. The Company
also announced an $.08 per share dividend payable March 28, 2003, to
shareholders of record on March 14, 2003.
The following table summarizes the Company's stock repurchase programs during
2002:
Date Date # of Shares Average
Program# Announced Completed Repurchased Price per Share
-------- --------- --------- ----------- ---------------
23rd 10/23/01 3/29/02 174,636 $19.14
24th 3/29/02 6/18/02 100,000 $21.32
25th 6/18/02 3/7/03 100,000 $26.53
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.
On November 1, 2002, the Company entered into the Merger Agreement with Midwest
Banc that, if approved by the Company's stockholders at a special meeting of
stockholders, will result in the Company being merged with and into Midwest
Banc. The special meeting of stockholders originally scheduled for March 17,
2003, was cancelled after Midwest Banc informed CoVest Bancshares that bank
regulatory agencies would be delaying the processing of Midwest's applications
to acquire the Company.
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
37
Bank's operating results are also affected by other income consisting of service
charges, loan origination and servicing fees, mortgage banking 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.
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 most 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. 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 1999 and 2000 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
Company sold $54.1 million of its single family mortgage loan portfolio in March
2001, in anticipation of falling rates and the risk of prepayments. This reduced
the Company's interest rate risk exposure on long term fixed rate assets that
had the ability to be refinanced by the borrower without penalty should rates
decline. The sale consisted of a $28.5 million sale of single use customer
mortgages and a $25.6 million sale of multi-use service customer mortgages.
Single use customer mortgages are customers with no other banking relationship
with the Company besides the mortgage loan. These loans were sold on a service
release basis, which means discontinuing the collection of principal and
interest payments, thereby giving up the rights of collecting servicing income.
Multi-service customer mortgages are customers with other banking relationship
with the Company, such as deposit account relationships and home equity lines of
credit. These multi-service customer mortgages were sold on a service retained
basis, which means continuing the collection of principal and interest payments
for the remaining term of the loan and the right to receive servicing income
from the loan purchaser. Associated with the mortgage loan sale in March 2001
was $196,000 of capitalized "mortgage servicing rights" on service retained
mortgages with an $81,000 balance as of December 31, 2002. Proceeds from the
sale were used to fund growth in the commercial and multi-family portfolios.
In April 2002, the Company sold $20.1 million of its multi-family loan portfolio
which consisted of 5-year adjustable rate loans where the rate is fixed for the
first 5-year term and then reprice off the 5-year Treasury index for the next
five years. There was no gain or loss on the transaction and the loans were sold
at 7% pass-through until the next rate adjustment. The overall average gross
rate was 8.00%. The Company retains the servicing of the loans for a 0.25%
servicing fee and a 50/50 split of the prepayment fee negotiated for the life of
the contract.
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 a
multi-family loan. The Company's ability to serve this market helped to expand
the commercial related portfolio by $40.2 million during 2002. Most of this
increase came in multi-family loans, which increased by $29.6 million, followed
by increases of $5.1 million in
38
commercial real estate loans and $9.7 million in commercial loans. Mortgage
loans decreased by $4.1 million, consumer loans decreased by $8.4 million and
leases outstanding decreased by $1.3 million.
Total deposits increased 4% to $473.6 million from $456.0 million at December
31, 2001. Savings accounts increased $42.7 million, or 82%, interest-bearing
checking accounts increased $5.5 million, or 19%, and non-interest-bearing
checking accounts increased $2.7 million, or 9%. The High Yield Money Market
account decreased $28.5 million, or 25%, and certificates of deposits decreased
$26.0 million, or 14%. The Company believes that the decline in the 91-day
Treasury Bill rate to which the High Yield Money account is indexed caused the
decline and believes that customers shifter their deposits to savings accounts
that remained at a 2.50% yield until October 1, 2002. On October 1, 2002, the
Company implemented relationship pricing on its savings accounts whereby savings
account customers with related checking accounts would earn 2.25%, while
non-relationship savings account customers would earn 1.50%. As of December 31,
2002, relationship savings accounts totaled $74.1 million. The floor rate set on
the High Yield Money Market account was 1.25% at inception. On January 30, 2003,
the floor rate was decreased to 1.00%, in line with the 91-day Treasury Bill
rate to which the High Yield Money Market account is indexed. Certificates of
deposit decreased $26.0 million, or 14% while purchased certificates of deposit
increased $21.2 million, or 46%.
The Company continues to build its volume of non-interest bearing checking
accounts with complementary deposit products and services such as direct deposit
and debit cards. The checking account is a core account of the community bank.
From the Company's perspective, it also helps improve non-interest income and
will help to improve the Company's net interest margin. The Company offers
promotions to attract new checking accounts and provide additional services,
such as Internet Banking and Telephone Banking, to make these accounts more
desirable in the marketplace. In setting its rates on certificates of deposit,
the Company regularly evaluates: (1) its investment and lending opportunities;
(ii)its liquidity position; (iii) the rates being offered by competing
institutions; and (iv) its internal cost of funds. It order to decrease the
volatility of its deposits, the Company imposes penalties on early withdrawal of
its certificates of deposit.
At December 31, 2002, total non-performing loans amounted to $6.0 million, or
1.12% of net loans receivable compared to $2.5 million, or 0.50% of net loans
receivable at December 31, 2001. The Company had $3,934,000 of impaired loans at
December 31, 2002. The Company had three commercial real estate loans to related
borrowers totaling $3,016,000 that were put to non-accrual in the third quarter
of 2002. The Company had begun the foreclosure process and is having new
appraisals performed on the properties. As of December 31, 2002, the Company had
allocated $300,000 of the allowance for loan losses to these impaired loans.
Subsequently, in the first quarter of 2003, the Company charged off the
$300,000. A $1,426,000 multi-family loan was put to non-accrual in June 2002.
The Company charged-off $159,000 of this loan during the second quarter of 2002.
A subsequent repayment was made on this loan and now has a balance of $918,000.
$1,468,000 of non-performing assets as of December 31, 2002 consisted of loans
delinquent 90 days or more and still accruing. As of March 27, 2003, $675,000 of
the accruing loans delinquent 90 days or more as of December 31, 2002 had been
made current. The $661,000 other real estate owned is an undeveloped commercial
property in Chicago. The loan balance was $780,000 and the Company took a
$118,000 charge-off on the loan during 2001. The property was sold in February
2003 and incurred $57,000 of expense and a $27,000 loss on the sale.
At December 31, 2002, the allowance for loan losses amount to $7.4 million, or
1.18x non-performing loans and compared to $6.5 million, or 2.58x coverage at
December 31, 2001. The ratio of allowance for loan losses to total outstanding
loans was 1.30% as December 31, 2002, compared to 1.27% for December 31, 2001.
Stockholders' equity in CoVest Bancshares, Inc. totaled $48.6 million at
December 31, 2002. The number of common shares outstanding was 3,480,381 and the
book value per common share outstanding was $14.29 as of December 31, 2002,
excluding unearned ESOP shares.
The Company completed its 23rd, 24th and 25th stock repurchase program on March
29, 2002, June 18, 2002 and March 7, 2003 respectively. On March 7, 2003, the
Company announced its 26th stock repurchase program, enabling the Company to
repurchase up to 100,000 shares in the open market or through privately
negotiated transactions. The Company has repurchased 13,440 shares to date at an
average price of $28.01 per share under this latest stock repurchase program.
39
On February 22, 2002, The Employee Stock Ownership Plan (ESOP) purchased 81,477
shares of CoVest Bancshares, Inc. common stock, held in the Company's treasury,
for an aggregate purchase price of $1,500,000, or $18.41 per share. A new loan
in the amount of $1.5 million plus interest will be repaid over a period of
fifteen years from earnings generated by the Company. As of March 27, 2003 the
balance of the loan was $1.0 million.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
GENERAL
The Company earned $6,596,000 for the year ended December 31, 2002, up 14% over
$5,769,000 for the year ended December 31, 2001. This represented $1.93 (basic)
and $1.84 (diluted) earnings per share versus $1.54 (basic) and $1.50 (diluted)
earnings per share for 2001, an increase of 25% and 23% respectively from 2001.
Cash earnings for 2002, consisting of net earnings of $6,596,000 and the after
tax effect of goodwill of $102,000, were $6,698,000, or $1.96 (basic) and $1.87
(diluted) earnings per share, compared to $5,871,000 or $1.57 (basic) and $1.52
(diluted) earnings per share in 2001.
Returns on average equity and average assets for 2002 were 14.15% and 1.10%
respectively, compared to 12.05% and 0.99% for 2001.
INTEREST INCOME
Interest income (tax equivalent) on earning assets decreased 15% to $36,683,000
for 2002 compared to $43,009,000 for 2001. The average balance on interest
earning assets increased $15.9 million with an overall yield of 6.34%, a 17%
decrease compared to 7.64% in 2001. In 2002, average loans receivable were
$513.9 million, a 3% increase compared to $497.7 million in 2001. The average
yield on loans was 6.55% for 2002, 135 basis points lower than 7.90% in 2001.
Multi-family loans experienced the biggest average increase by $37.1 million.
Commercial loans also increased by $12.2 million. In November 2002, the Federal
Reserve Bank reduced Fed Funds Rate by 50 basis points resulting in the prime
rate decreasing from 4.75% to 4.25%. The multi-family loan portfolio, which
comprised 47% of the Company's loan portfolio, is mostly comprised of adjustable
rate loans with floors and prepayment penalties established upon origination.
The floor set on these adjustable rate loans mitigated the decline in interest
rate. However, in the event interest rates rise, the interest rates on these
loans will not necessarily rise, depending on the amount of rate increase. As of
December 31, 2002, $176.3 million of the Company's loans were prime based.
Mortgage loans decreased by $18.9 million. The Company continues to originate
single family mortgage loans. In general, the Company retains in its portfolio
only single-family mortgage loans that provide periodic adjustments of the
interest rate (adjustable-rate mortgage loans). Consumer loans decreased by $6.6
million. Investments, including overnight deposits averaged $64.9 million in
2002, relatively at the same level in 2001. Investments yielded 4.67% in 2002, a
97 basis points decrease compared to 5.64% in 2001.
INTEREST EXPENSE
Interest expense for 2002 decreased 33% to $15,291,000 compared to $22,845,000
for 2001. The average cost of interest bearing liabilities decreased 162 basis
points to 3.02% compared to 4.64% in 2001. Total average deposits increased by
$7.3 million in 2002 with cost decline of 167 basis points compared to 2001.
Savings accounts increased by $30.2 million while the High Yield Money Market
account decreased $21.4 million. The yield on the High Yield Money Market
account decreased to 1.65%, 182 basis points lower than 3.47% in 2001. The
decrease was mostly attributed to the decline in the 91-day Treasury bill rate
to which the High Yield Money Market account is indexed. The floor rate set on
the High Yield Money Market account was 1.25% at inception. On January 30, 2003,
the floor rate was decreased to 1.00% to be in line with the 91-day Treasury
Bill rate to which the High Yield Money Market account is indexed. The Company
believes that customers shifted their funds to savings accounts that remained at
2.50% yield until October 1, 2002. On October 1, 2002, the Company implemented
relationship pricing on savings accounts where savings accounts with related
checking accounts earn 2.25%, while non-relationship savings accounts earn
1.50%. As of December 21, 2002, relationship savings accounts totaled $74.1
million. The Company believes that this pricing is competitive in its market
area. Certificates of deposits decreased by $7.8 million with cost decline of
202 basis points compared to 2001. Included in certificates of deposits are
purchased certificates of deposits that averaged $56.7 million in 2002,
relatively the same level in 2001. The yield on purchased certificates of
deposit decreased by 246 basis points in 2002. Interest bearing checking
accounts increased $6.3 million. The average balance of FHLB advances increased
$10.3 million with a cost decline of 159 basis points
40
compared to 2001. Other borrowed money decreased $2.5 million with a cost
decline of 169 basis points compared to 2001.
On October 9, 2001, the Company entered into an Interest Rate Cap Agreement with
Morgan Keegan for a notional amount of $10.0 million for three years, against
the 91-day Treasury Bill rate, at the strike rate of 4.50%. The Company paid a
fixed amount of $113,000 covering the entire 3-year agreement. A weekly average
calculation is used to determine Morgan Keegan's position and Morgan Keegan is
liable for the difference when the 91-day Treasury Bill rate exceeds 4.50%. The
cost is amortized over 3 years and is recorded as part of interest expense.
NET INTEREST INCOME
Net interest income increased $1,273,000, or 6.37% in 2002 compared to 2001. The
average yield on interest earning assets decreased by 130 basis points in 2002
compared to 2001. The average cost of interest bearing liabilities decreased 162
basis points in 2002 compared to 2001. The average net interest spread increased
to 3.32% in 2002, a 32 basis points increase from 3.00% in 2001. The net
interest margin increased to 3.70% in 2002, a 12 basis points increase from
3.58% in 2001. The average non-interest bearing deposits slightly increased by
$5.0 million in 2002.
Changes in interest rates impact the Company's net income. Changes in interest
rates impact the demand for new loans, the credit profile of existing loans, the
rates received on loans and securities and rates paid on deposits and
borrowings. The relationship between the rates received on loans and securities,
and the rates paid on deposits and borrowings, known as the interest spread,
could be expected to initially increase during times of falling rates, when the
91-day Treasury bill rate, from which the High Yield Money Market account is
priced, declines faster that the prime rate. Conversely, the interest spread
could decline during times of increasing interest rates.
The Company's implementation of relationship pricing on savings accounts where
relationship savings accounts with related checking accounts earn 2.25% while
non-relationship savings accounts earn 1.50%, resulted in slightly lower cost
and also opened an opportunity to increase its non-interest bearing deposits.
The Company's lowering the floor on the High Yield Money Market account also
helped in the decrease of cost of funds. With any further decline in interest
rates, the Company's ability to proportionately decrease the rates on deposit
sources, particularly certificates of deposit accounts, may not be possible due
to competitive pressures. This may result in the decrease in interest spread.
Although we believe our current level of interest sensitivity is reasonable,
significant reduction in interest rates may have an adverse effect on our
business, financial condition and results of operation.
PROVISION FOR LOAN LOSSES
The amount of the provision for loan losses is based on quarterly evaluations of
the loan portfolio, with particular attention toward non-performing and other
potential problem loans. During these evaluations, consideration is also given
to such factors as management's evaluation of specific loans, the level and
composition of impaired and other non-performing loans, historical loss
experience, results of examinations by regulatory agencies, independent loan
review, the market value of collateral, the estimate of discounted cash flows,
the strength and availability of guaranties, concentration of credits, and other
factors.
The 2002 provision for loan losses totaled $1,053,000 compared to $1,602,000 in
2001. Net loan charge-offs for 2002 was $561,000 compared to $710,000 in 2001.
The ratio of allowance for loan losses to total outstanding loans was 1.30% in
2002 compared to 1.27% in 2001. The ratio of loan losses to non-performing loans
was 1.18x for 2002 compared to 2.58x in 2001. The total non-performing loans as
of December 31, 2002 included $1,468,000 accruing loans delinquent 90 days or
more. At December 31, 2002, non-performing loans amounted to $5,967,000, or
0.98% of total assets compared to $2,538,000 or 0.43% of total assets at
December 31, 2001. The Company believes that the allowance for loan losses was
adequate to absorb probable incurred losses on existing loans, however, there
can be no assurance that such losses will not exceed estimated amounts.
NON-INTEREST INCOME
Non-interest income for 2002 increased $698,000, or 16% compared to that for
2001. Loan prepayment fees increased $663,000. Other income increased $237,000.
Included in other income for 2002 was $94,000 non-taxable increase in the cash
surrender value of life insurance policies, a $108,000 of interest on State of
Illinois income tax refunds for 1992 and 1993, and a $27,000 gain on sale of
other real estate owned. Included in other income for 2001 were $137,000 credit
card servicing income, $80,000 write off of building signs for the Company's
three branches
41
and a $36,000 loss on sale of other real estate owned. Gain on sale of loans
decreased $407,000 in 2002. In 2001, the Company realized a $407,000 gain on
sale of $54.5 million of its single-family residential loans. Gain on sale of
investments increased $251,000 in 2002. In 2002, the Company realized a $216,000
gain on sale of investments, while in 2001 the Company realized a loss of
$35,000.
NON-INTEREST EXPENSE
Non-interest expenses for 2002 increased $1,078,000, or 8% compared to that in
2001. Compensation and benefits increased $717,000. Compensation increased
$238,000, Employee Stock Ownership Plan expenses increased $342,000 as a result
of the reloading of the plan in February 2002 and, post-retirement medical
insurance increased $294,000. The Plan was frozen in the fourth quarter of 2002.
These increases were offset by decreases in directors' retirement expenses of
$41,000, group medical self-insurance of $69,000 and Bank Incentive Plan expense
of $67,000. Expenses on real estate owned increased by $324,000. Other expenses
increased $179,000, which consisted mostly of $88,000 of legal expense and
$100,000 of investment banking expenses related to the acquisition of the
Company by Midwest Banc Holdings, Inc. The efficiency ratio for 2002 was 56%,
which was the same as in 2001.
The Company's consolidated income tax rate varies from statutory rates
principally due to interest income from tax exempt securities and loans,
increase in cash surrender of life insurance policies and appreciation in
Company's stock in relation to the Employee Stock Ownership Plan. The Company
recorded income tax expense of $3.9 million in 2002 as compared to $3.3 million
in 2001, and increase of 18.7% due to changes in income. The effective tax rate
was 37.2% in 2002 and 36.3% in 2001.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
GENERAL
The Company earned $5,769,000 for the year ended December 31, 2001, versus
$4,550,000 for the year ended December 31, 2000. This represented $1.54 (basic)
and $1.50 (diluted) earnings per share versus $1.14 (basic) and $1.12 (diluted)
earnings per share for 2000, an increase of 35% and 34% respectively from 2000.
Returns on average equity and average assets for 2001 were 12.05% and 0.99%
compared to 9.75% and 0.80% in 2000.
INTEREST INCOME
Interest income for 2001 decreased by $984,000, a decrease of 2% from 2000. The
Federal Reserve's eleven rate reductions during 2001 caused a decrease in
various rate indices and caused a decrease in the Company's interest received on
loans and investments. The average balance of earning assets in 2001 increased
by $13.3 million, with an overall yield of 7.64%, a 5% decrease compared to
8.01% in 2000. In 2001, average loans receivable were $497.7 million versus
$477.4 million in 2000, an increase of 4%. The average yield on loans was 7.90%
for 2001, 38 basis points lower than 8.28% in 2000. As of December 31, 2001, the
Company has $103.6 million prime based loans in its portfolio. Adjustable rate
loans are indexed to the prime rate, 91-day Treasury Bill, 1 year, 3 year and 5
year constant maturity Treasuries. The terms of the loans on multi-family loans
and commercial real estate loans are subject to floors and ceilings for the
entire term of the loan. This means that if the rates go down, the rates on the
loans cannot go below the floor levels. Some loans may currently be at their
floor level, which in a rising rate environment may not increase proportionally
with the index. On the other hand, when rates go up, loans that have hit their
ceiling may not go up in relation to their individual indexes. Multi-family
loans experienced the biggest average increase by $51.1 million. Commercial
loans, commercial real estate loans and construction loans also increased.
Commercial leases, mortgage loans and auto loans decreased. Amortized loan costs
related to multi-family loan prepayments, which were accounted for as a
reduction to interest income, amounted to $273,000 in 2001. Investments,
including overnight deposits, averaged $65.2 million for 2001, a 10% decrease
from $72.2 million in 2000. Investments yielded 5.64% in 2001, 61 basis points
lower than 6.25% in 2000.
INTEREST EXPENSE
Interest expense for 2001 decreased $3.7 million, a 14% decrease from 2000.
Average interest bearing liabilities increased by $5.9 million with an overall
yield of 4.64%, a 15% decrease compared to 5.46% in 2000. The average cost on
interest bearing liabilities decreased 82 basis points in 2001, which is almost
twice as fast as the yield on earning assets declined. The decrease is mostly
attributed to the fast decline in the 91-day Treasury Bill rate to which
42
the High Yield Money Market account is indexed. The yield on the High Yield
Money Market account decreased to 3.47%, 233 basis points lower than 5.80% in
2000. The average balance of the High Yield Money Market account increased $16.9
million, a 16% increase from 2000. Interest-bearing checking accounts increased
$2.2 million, certificates of deposits, including jumbo certificates of
deposits, increased $9.9 million. The increase in core deposits enabled the
Company to payoff higher yielding purchased money deposits. The average balance
of purchased money deposits decreased $7.8 million and FHLB advances decreased
$13.4 million. Management anticipates its cost of funds to increase as the
direct result of increases in the weekly 91-day Treasury Bill rates.
On October 9, 2001, the Company entered into an Interest Rate Cap Agreement with
Morgan Keegan for a notional amount of $10.0 million for three years, against
the 91-day Treasury Bill rate, at the strike rate of 4.50%. The Company paid a
fixed amount of $113,000 covering the entire 3-year agreement. A weekly average
calculation is used to determine Morgan Keegan's position and Morgan Keegan is
liable for the difference when the 91-day Treasury Bill rate exceeds 4.50%. The
cost is amortized over 3 years and is recorded as part of interest expense.
NET INTEREST INCOME
Net interest income increased $2,703,000 or 15.6% in 2001 versus 2000, mostly as
a result of average cost of interest bearing liabilities being 82 basis points
less than in 2000. The average yield on interest earning assets decreased by 37
basis points in 2001 compared to 2000. The average cost of interest bearing
liabilities decreased 82 basis points, which was about twice as fast as the
yield decrease on earning assets. The average net interest spread increased to
3.00% in 2001, a 45 basis points increase from 2.55% in 2000. The net interest
margin increased to 3.58% in 2001, a 40 basis points increase from 3.18% in
2000. Average non-interest bearing deposits increased by $5.0 million, a 22%
increase to 2000.
The Company's net income is impacted by changing interest rates. Changes in
interest rates impact the demand for new loans, the credit profile of existing
loans, the rates received on loans and securities and rates paid on deposits and
borrowings. The relationship between the rates received on loans and securities,
and the rates paid on deposits and borrowings, known as the interest spread,
could be expected to initially increase during times of falling rates when the
91-day Treasury bill rate, from which the High Yield Money Market account is
priced, declines faster than the prime rate.
The Federal Reserve's incremental rate reductions caused a decrease in the
Company's prime rate from 9.50% to 4.75% during 2001, which resulted in a
decrease in the Company's interest received on loans and securities and rates
paid on deposits and borrowings.
PROVISION FOR LOAN LOSSES
The amount of the provision for loan losses is based on quarterly evaluations of
the loan portfolio, with particular attention directed toward non-performing and
other potential problem loans. During these evaluations, consideration is also
given to such factors as management's evaluation of specific loans, the level
and composition of impaired and other non performing loans, historical loss
experience, results of examinations by regulatory agencies, independent loan
review, the market value of collateral, the estimate of discounted cash flows,
the strength and availability of guaranties, concentrations of credits, and
other factors.
The 2001 provision for loan losses totaled $1,602,000 compared with $1,010,000,
in 2000. The change in the Company's loan portfolio mix, as well as the increase
in charge-offs by $522,000, prompted the Company to increase its allowance for
loan losses. The single family mortgage loan portfolio decreased by $62.2
million in 2001 compared to 2000, mostly from the sale in March 2001. Those
funds and an additional $14.9 million were redeployed into various types of
commercial, multi-family, commercial real estate, and construction lending.
Although the Company is not aware of any undisclosed potential losses in these
types of loans, the Company acknowledges the difference in the risks between
single family mortgage loans and traditional commercial lending.
NON-INTEREST INCOME
Non-interest income for 2001 was $4.2 million, a 47% increase from $2.9 million
for 2000. The Company experienced loan payoffs in multi-family loans due to the
decrease in various lending rates and the prepayment fees of $781,000 that were
collected from the early payoff of loans. The decrease in various lending rates
also resulted in more loan originations for the Company. Total loans originated
in 2001 amounted to $242.5 million, a 42% increase from 2000. Loan charges and
servicing fees including prepayment fees, increased $694,000, a 67% increase
from
43
2000. This was mostly attributed to prepayment fees increasing by $543,000 and
lien release fees increasing by $69,000. Mortgage banking fees increased
$277,000, a 64% increase from 2000. This was mostly attributed to a document
fees increase of $120,000, a loan application fees increase of $63,000 and
conventional loan fees increasing by $122,000. In 2001, the Company introduced
check imaging to its deposit customers and joined AGREE, an alliance of
financial institutions that belong to the Cash Station network which expanded
the availability of ATMs for customers. Also in 2001, the Company enhanced its
cash management services by offering an internet cash management solution to
commercial banking customers. Deposit related charges increased $179,000, a 17%
increase from 2000. Service fees on retail checking accounts increased $56,000,
account analysis charges on commercial accounts increased $75,000 and NSF fees
increased $58,000. Other income decreased $265,000, a 55% decrease from 2000.
The decrease was partially due to CoVest Investment's income decrease of
$72,000. In 2001, the Company incurred a $36,000 loss on disposition of other
real estate owned, compared to a gain of $102,000 in 2000.
NON-INTEREST EXPENSE
Operating expenses for 2001 were $13.6 million, a 12% increase from $12.1
million for 2000. This was mostly due to increase in compensation and benefits
of $542,000. The Company was fully staffed at year-end 2001 and the cost of
medical insurance and prescription costs has increased by $155,000, or 26% over
2000. Commissions and incentives increased $222,000 due to higher volume of
mortgage loan originations. The Company originated and sold 273 mortgage loans
in 2001, an 85% increase from 147 loans in 2000. Data processing expenses
increased $132,000 due to the addition of check imaging and a full year's
internet banking costs. Advertising expense increased $225,000 as the Company
aggressively pursued deposits and promoted loan products. Other expenses
increased $437,000 due to: professional fees increased $242,000, mainly due to
increased efforts in loan collection, and expanded audit coverage; general and
administrative expenses increased $71,000; expenses related to other real estate
owned increased $34,000; and amortization of intangibles increased $75,000. The
efficiency ratio for 2001 was 56%. This is 7% better than the 60% experienced in
2000.
The Company's consolidated income tax rate varies from statutory rates
principally due to interest income from tax-exempt securities and loans. The
Company recorded income tax expense of $3.3 million in 2001 as compared to $2.5
million in 2000, an increase of 31.4% due to changes in income. The effective
tax rate was 36.3% in 2001 and 35.5% in 2000.
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,
-----------------------
2002 2001
---- ----
(Dollars in Thousands)
Average Interest Average Interest
Annual Earned/ Yield/ Annual Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- ----------- ----------- ----------- ----------- -----------
Interest-earning assets
Commercial loans (A) (B) $ 52,394 $ 3,078 5.87% $ 40,230 $ 2,944 7.32%
Multi-family loans (A) (B) 229,481 14,421 6.28 192,381 14,517 7.55
Comm real estate loans (A) (B) 80,811 5,457 6.75 84,306 6,810 8.08
Construction loans (B) 51,462 3,642 7.08 53,418 4,973 9.31
Commercial leases (A) (B) 1,128 66 5.85 3,246 195 6.01
Mortgage (A) (B) 56,222 4,177 7.43 75,141 5,829 7.76
Consumer loans (A) 42,413 2,812 6.63 49,012 4,067 8.30
Securities 43,977 2,191 4.98 41,360 2,378 5.75
Mortgage-backed securities 2,600 190 7.31 5,407 385 7.12
Equity Investments 9,427 516 5.47 8,529 508 5.96
Other investments 8,864 133 1.50 9,865 403 4.09
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets 578,779 36,683 6.34% 562,895 43,009 7.64%
Non-interest earning assets 19,626 20,707
----------- -----------
TOTAL ASSETS $ 598,405 $ 583,602
=========== ===========
Interest-bearing liabilities
NOW accounts $ 31,428 414 1.32% $ 25,106 328 1.31%
Savings accounts 74,507 1,765 2.37 44,301 1,108 2.50
Money Market accounts 98,828 1,630 1.65 120,233 4,178 3.47
Certificates 228,557 8,517 3.73 236,352 13,596 5.75
FHLB advances 63,195 2,730 4.32 52,882 3,123 5.91
Other borrowed money 10,605 235 2.22 13,079 512 3.91
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities 507,120 15,291 3.02% 491,953 22,845 4.64%
Non-interest bearing deposits 32,977 27,989
Other liabilities 11,700 15,781
----------- -----------
TOTAL LIABILITIES 551,797 535,723
Stockholders' equity 46,608 47,879
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 598,405 $ 583,602
=========== ===========
Net interest income $ 21,392 $ 20,164
=========== ===========
Net interest spread 3.32% 3.00%
=========== ===========
Net earning assets $ 71,659 $ 70,942
=========== ===========
Net yield on average interest-
earning assets 3.70% 3.58%
=========== ===========
Average interest-earning assets to
average interest-bearing
liabilities 1.14X 1.14X
=========== ===========
Year Ended December 31,
-----------------------
2000
----
(Dollars in Thousands)
Average Interest
Annual Earned/ Yield/
Balance Paid Rate
----------- ----------- -----------
Interest-earning assets
Commercial loans (A) (B) $ 27,729 $ 2,276 8.21%
Multi-family loans (A) (B) 141,246 11,348 8.03
Comm real estate loans (A) (B) 72,012 5,947 8.26
Construction loans (B) 44,545 4,883 10.96
Commercial leases (A) (B) 13,180 827 6.27
Mortgage (A) (B) 126,604 9,505 7.51
Consumer loans (A) 52,073 4,728 9.08
Securities 42,756 2,563 5.99
Mortgage-backed securities 15,363 1,061 6.91
Equity Investments 7,800 512 6.57
Other investments 6,254 377 6.03
----------- ----------- -----------
Total interest-earning assets 549,562 44,027 8.01%
Non-interest earning assets 17,552
-----------
TOTAL ASSETS $ 567,114
===========
Interest-bearing liabilities
NOW accounts $ 22,892 255 1.11%
Savings accounts 46,806 1,172 2.50
Money Market accounts 103,367 5,998 5.80
Certificates 234,259 14,265 6.09
FHLB advances 66,344 4,083 6.15
Other borrowed money 12,384 759 6.13
----------- ----------- -----------
Total interest-bearing liabilities 486,052 26,532 5.46%
Non-interest bearing deposits 22,949
Other liabilities 11,439
-----------
TOTAL LIABILITIES 520,440
Stockholders' equity 46,674
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 567,114
===========
Net interest income $ 17,495
===========
Net interest spread 2.55%
===========
Net earning assets $ 63,512
===========
Net yield on average interest-
earning assets 3.18%
===========
Average interest-earning assets to
average interest-bearing
liabilities 1.13X
===========
(A) Includes cash basis loans.
(B) Includes deferred fees/costs.
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,
2002 2001 2000
---- ---- ----
Weighted average yield on
Commercial loans 5.34% 6.54% 9.02%
Commercial real estate loans 6.22 7.93 8.57
Multi-family loans 5.84 7.17 8.42
Construction loans 6.32 7.34 10.28
Commercial leases 6.43 6.46 6.40
Mortgage 7.61 7.40 7.64
Consumer loans 6.16 7.49 9.40
Mortgage-backed securities 7.05 7.05 6.84
Securities 4.64 5.37 7.05
Other investments 3.82 5.72 5.90
Combined weighted average yield on interest-earning assets 5.92 7.15 8.46
Weighted average rates paid on
Savings accounts 2.08 2.50 2.50
NOW accounts 1.27 1.33 1.12
Money market accounts 1.29 1.76 5.85
Certificates 3.47 4.41 6.40
FHLB advances 3.89 4.63 6.27
Other borrowed money 1.51 2.09 6.17
Combined weighted average rate paid on interest-bearing liabilities 2.61 3.41 5.66
Net interest rate spread 3.31 3.75 2.80
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.
2002 vs. 2001 2001 vs. 2000
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 $ 1,278 $(6,960) $(5,682) $ 2,448 $(2,627) $ (179)
Mortgage-backed securities (200) 5 (195) (688) 12 (676)
Securities and other
investments 138 (587) (449) 184 (347) (163)
------- ------- ------- ------- ------- -------
Total interest-earning
assets 1,216 (7,542) (6,326) 1,944 (2,962) (1,018)
------- ------- ------- ------- ------- -------
Interest-bearing liabilities
NOW accounts 81 5 86 (25) (48) (73)
Savings accounts 745 (88) 657 64 -- 64
Money markets (734) (1,814) (2,548) (978) 2,798 1,820
Certificates (442) (4,637) (5,079) (56) 725 669
FHLB advances 601 (994) (393) 763 197 960
Other borrowed money (96) (181) (277) 26 221 247
------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities 155 (7,709) (7,554) (206) 3,893 3,687
------- ------- ------- ------- ------- -------
Net change in interest
income $ 1,061 $ 167 $ 1,228 $ 1,738 $ 931 $ 2,669
======= ======= ======= ======= ======= =======
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 $10.2 million for the year ended December 31, 2002. Net cash used
in investing activities was $23.9 million for the year ended December 31, 2002.
Loan sales generated $20.1 million. Securities sales generated $9.7 million
while principal payments on mortgage-backed and related securities amounted to
$1.7 million. Proceeds from maturity of securities amounted to $39.3 million.
Purchases of securities were $47.3 million, and loan originations, net of
principal payments, were $48.7 million for the year. Net cash provided by
financing activities amounted to $14.7 million for the year ended December 31,
2002. Cash used to purchase treasury stock amounted to $6.8 million. Deposits
increased by $17.6 million.
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,
2002, the Company had approved and accepted commitments to originate loans
totaling $12.2 million, and its customers had approved but unused lines of
credit totaling $90.4 million. Additionally, the Company had $7.6 million in
letters of credit. 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.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
(Dollars in thousands) Payments due by period
----------------------
Within 1 After
year 1-3 years 4-5 years 5 years Total
FHLB advances $35,200 $12,000 $5,000 $10,000 $62,200
Other borrowings 12,170 -- -- -- 12,170
------- ------- ------ ------- -------
Total contractual cash obligations $47,370 $12,000 $5,000 $10,000 $74,370
======= ======= ====== ======= =======
(Dollars in thousands) Amount of commitment expiration per period
------------------------------------------
Within 1 After
year 1-3 years 4-5 years 5 years Total
Lines of credit $24,674 $33,295 $13,068 $19,363 $90,400
Standby letters of credit -- -- -- 7,600 7,600
------- ------- ------- ------- -------
Total commercial commitments $24,674 $33,295 $13,068 $26,963 $98,000
======= ======= ======= ======= =======
48
CAPITAL RESOURCES
At December 31, 2002, the Bank had total risk based capital of $50.1 million.
This was approximately $6.8 million above the 10% ratio required to be "well
capitalized." Tier 1 risk based capital was $44.6 million. This was
approximately $18.6 million or 4.3% above the required ratio of 6%. The Tier 1
capital leverage ratio was 7.4%. This was approximately $14.7 million or 2.4%
above the required ratio of 5%.
The Company completed its 23rd, 24th and 25th stock repurchase programs on March
29, 2002, June 18, 2002 and March 7, 2003 respectively. On March 7, 2003, the
Company announced its 26th stock repurchase program, enabling the Company to
repurchase up to 100,000 shares in the open market or through privately
negotiated transactions. The Company has repurchased 13,440 shares to date at an
average price of $28.01 per share under this latest stock repurchase program.
On February 22, 2002, the Employee Stock Ownership Plan (ESOP) purchased 81,477
shares of CoVest Bancshares, Inc. common stock, held in the Company's treasury,
for an aggregate purchase price of $1,500,000, or $18.41 per share. A new loan
in the amount of $1.5 million plus interest will be repaid over a period of
fifteen years from earnings generated by the Company. As of March 11, 2003, the
balance of the loan was $1.0 million.
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 of Directors 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 obtained
from various sources, are used to augment borrowings when these rates are more
favorable. 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
49
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.
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 real estate and multi-family borrowers may also prepay loans for
various reasons, but prepayment penalties are assessed in accordance with terms
of the loan agreement. The Company has been setting floors on its non-retail
adjustable rate loans as a protection in a falling rate environment, since the
introduction of that type of product to its loan mix. In a falling rate
environment where the index to which an adjustable rate loan falls, the rate on
the loan will not go down below the floor rate. On the other hand, if rates go
up, there is a likelihood that the rate on the loan will not go up if the rate
change from the index to which the loan is tied to is still below the floor
rate. The rate might increase, but not by the same amount of increase in rates
in general since the increase will be based on the index rate even though the
loan is currently at its floor rate. On October 9, 2001, the Company entered
into an Interest Rate Cap Agreement with Morgan Keegan for a notional amount of
$10 million for three years, against the 91 day Treasury Bill rate, at the
strike rate of 4.50%. The Company paid a fixed amount of $113,000 covering the
entire 3-year agreement. A weekly weighted average calculation is used to
determine Morgan Keegan's position and Morgan Keegan will be liable for the
difference when the 91 day Treasury Bill rate exceeds 4.50%. The Company
believes that the move will help cushion the impact of rising rates,
particularly on the High Yield Money Market account that is indexed to the
weekly 91 day Treasury Bill auction.
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
50
instruments, and equity at current interest rates, and at hypothetical higher
and lower interest rates at one percent intervals. The present value of each
major category of financial instrument is calculated by the model using
estimated cash flows based on weighted average contractual rates and terms at
discount rates representing the estimated current market interest rate for
similar financial instruments. The resulting present value of longer term
fixed-rate financial instruments are more sensitive to change in a higher or
lower market interest rate scenario, while adjustable-rate financial instruments
largely reflect only a change in present value representing the difference
between the contractual and discounted rates until the next interest rate
repricing date.
The following table presents the Company's exposure to hypothetical changes in
interest rates as of December 31,
2002 2001
---- ----
Changes in Percent Change in Percent Change in Percent Change Percent Change in
Interest Rates Net Interest MV of Portfolio in Net Interest MV of Portfolio
(basis points) Income Equity Income Equity
- --------------- ----------------- ----------------- -------------- -----------------
+200 9% -3% -2% -3%
+100 4 -1 -1 -1
0 0 0 0 0
-100 -1 +4 +2 +3
The following table presents the Company's cumulative gap position as of the
dates indicated:
December 31, 2002 December 31, 2001
----------------- -----------------
(Dollars in thousands)
90 days $98,197 ($29,177)
182 days $93,853 ($31,359)
365 days $47,023 ($39,214)
Gap represents the difference of repricing opportunities between the Company's
assets and liabilities for the next twelve months.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate mortgage loans,
have features that restrict changes in interest rates on a short-term basis and
over the life of the loan. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels could deviate significantly from those
assumed in calculating the tables. Finally, the ability of many borrowers to
service their debt may decrease in the event of a significant interest rate
increase.
In addition, the previous table does not necessarily indicate the impact of
general interest rate movements on the Company's net interest income because the
repricing of certain categories of assets and liabilities are subject to
competitive and other pressures beyond the Company's control. As a result,
certain assets and liabilities indicated as maturing or otherwise repricing
within a stated period may in fact mature or reprice at different times and at
different volumes.
51
CROWE CHIZEK [LOGO]
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated statements of financial condition
of CoVest Bancshares, Inc. as of December 31, 2002 and 2001, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2002. 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 auditing standards generally accepted
in the United States of America. 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, 2002 and 2001, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 24, 2003
52
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2002 2001
--------- ---------
ASSETS
Cash and cash equivalents
Cash on hand and in banks $ 7,562 $ 6,552
Interest-bearing deposits in other financial institutions 17 21
--------- ---------
7,579 6,573
Securities
Securities available-for-sale 41,489 40,897
Mortgage-backed securities available-for-sale -- 3,948
Federal Home Loan Bank stock and Federal Reserve Bank stock 7,681 7,319
--------- ---------
49,170 52,164
Loans and leases receivable, net
Loans receivable 542,063 516,167
Less allowance for loan losses 7,039 6,547
--------- ---------
535,024 509,620
Accrued interest receivable 2,639 3,281
Premises and equipment 8,824 9,466
Other real estate owned 661 661
Goodwill 1,084 1,251
Mortgage servicing rights 128 222
Other assets 3,812 2,491
--------- ---------
$ 608,921 $ 585,729
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 33,700 $ 30,993
Interest-bearing checking 34,836 29,339
Money market accounts 85,372 113,864
Savings accounts 94,885 52,141
Purchased money deposits 66,946 45,776
Certificates of deposit 157,868 183,889
--------- ---------
473,607 456,002
Short-term borrowings 47,370 29,425
Long-term borrowings from Federal Home Loan Bank 27,000 44,000
Advances from borrowers for taxes and insurance 5,587 4,865
Accrued expenses and other liabilities 6,771 6,286
--------- ---------
560,335 540,578
Stockholders' equity
Preferred stock, $.01 par value, 100,000 shares authorized, none issued -- --
Common stock, $.01 par value, 7,500,000 shares authorized,
4,403,803 shares issued at December 31, 2002 and 2001 44 44
Additional paid-in capital 18,831 17,268
Retained earnings 46,838 41,360
Treasury stock, at cost (2002 - 923,422 shares, 2001 - 965,580 shares) (16,603) (14,290)
Unearned ESOP shares (1,202) --
Accumulated other comprehensive income 678 769
--------- ---------
48,586 45,151
--------- ---------
$ 608,921 $ 585,729
========= =========
See accompanying notes to consolidated financial statements.
53
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2002 2001 2000
------- -------- --------
Interest income
Loans and leases receivable $33,652 $ 39,335 $ 39,508
Mortgage-backed securities 190 385 1,061
Securities
Taxable 1,838 1,890 2,368
Exempt from federal income taxes 233 322 377
Other interest and dividend income 648 911 513
------- -------- --------
36,561 42,843 43,827
Interest expense
Deposits 12,325 19,210 21,690
Advances from Federal Home Loan Bank 2,730 3,123 4,083
Other borrowed funds 235 512 759
------- -------- --------
15,290 22,845 26,532
------- -------- --------
NET INTEREST INCOME 21,271 19,998 17,295
Provision for loan losses 1,053 1,602 1,010
------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 20,218 18,396 16,285
Noninterest income
Loan charges and servicing fees 892 949 798
Loan prepayment fees 1,444 781 238
Mortgage banking fees 705 711 434
Deposit related charges and fees 1,233 1,216 1,037
Gain (loss) on sales of securities 216 (35) (96)
Gain on sales of loans -- 407 --
Other 453 216 481
------- -------- --------
4,943 4,245 2,892
Noninterest expense
Compensation and benefits 7,333 6,616 6,074
Commissions and incentives 797 814 592
Occupancy and equipment 1,959 1,926 2,028
Federal deposit insurance premium 80 86 83
Data processing 1,059 1,004 872
Advertising 725 808 583
Other 2,706 2,327 1,890
------- -------- --------
14,659 13,581 12,122
------- -------- --------
INCOME BEFORE INCOME TAXES 10,502 9,060 7,055
Income tax provision 3,906 3,291 2,505
------- -------- --------
NET INCOME $ 6,596 $ 5,769 $ 4,550
======= ======== ========
Earnings per common share
Basic $ 1.93 $ 1.54 $ 1.14
======= ======== ========
Diluted $ 1.84 $ 1.50 $ 1.12
======= ======== ========
See accompanying notes to consolidated financial statements.
54
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Common Accumulated
Stock and Other Total
Additional Unearned Compre- Stock-
Paid-In Retained Treasury Stock ESOP hensive holders'
Capital Earnings Stock Awards Loan Income (Loss) Equity
-------- -------- -------- -------- ------- ------------ --------
Balance at
January 1, 2000 $ 17,963 $ 33,514 $ (4,312) $(14) $ -- $(877) $ 46,274
Cash dividend ($.32 per share) -- (1,281) -- -- -- -- (1,281)
Exercise of stock options (581) -- 1,033 -- -- -- 452
Purchase of stock -- -- (2,965) -- -- -- (2,965)
Tax benefits related to
employee stock plans 163 -- -- -- -- -- 163
Stock awards earned -- -- -- 14 -- -- 14
Comprehensive income
Net income -- 4,550 -- -- -- -- 4,550
Net increase in fair value of
securities available-for-sale,
net of income taxes and
reclassification adjustments -- -- -- -- -- 827 827
--------
Total comprehensive income 5,377
-------- -------- -------- ---- ------- ----- --------
Balance at
December 31, 2000 17,545 36,783 (6,244) -- -- (50) 48,034
Cash dividend ($.32 per share) -- (1,192) -- -- -- -- (1,192)
Exercise of stock options (483) -- 1,457 -- -- -- 974
Purchase of stock -- -- (9,503) -- -- -- (9,503)
Tax benefits related to
employee stock plans 250 -- -- -- -- -- 250
Comprehensive income
Net income -- 5,769 -- -- -- -- 5,769
Net increase in fair value of
securities available-for-sale,
net of income taxes and
reclassification adjustments -- -- -- -- -- 819 819
--------
Total comprehensive income 6,588
-------- -------- -------- ---- ------- ----- --------
Balance at
December 31, 2001 $ 17,312 $ 41,360 $(14,290) $ -- $ -- $ 769 $ 45,151
======== ======== ======== ==== ======= ===== ========
(Continued)
55
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Common Accumulated
Stock and Other Total
Additional Unearned Compre- Stock-
Paid-In Retained Treasury Stock ESOP hensive holders'
Capital Earnings Stock Awards Loan Income (Loss) Equity
-------- -------- -------- ---- ------- ------------ --------
Balance at
December 31, 2001 $ 17,312 $ 41,360 $(14,290) $ -- $ -- $ 769 $ 45,151
Cash dividend ($.32 per share) -- (1,118) -- -- -- -- (1,118)
Treasury stock reissued in
conjunction with stock option
exercises and ESOP plan 397 -- 4,523 -- (1,500) -- 3,420
Release of ESOP shares 156 -- -- -- 298 -- 454
Purchase of stock -- -- (6,836) -- -- -- (6,836)
Tax benefits related to
employee stock plans 1,010 -- -- -- -- -- 1,010
Comprehensive income
Net income -- 6,596 -- -- -- -- 6,596
Net decrease in fair value of
securities available-for-sale,
net of income taxes and
reclassification adjustments -- -- -- -- -- (91) (91)
--------
Total comprehensive income 6,505
-------- -------- -------- ---- ------- ----- --------
Balance at
December 31, 2002 $ 18,875 $ 46,838 $(16,603) $ -- $(1,202) $ 678 $ 48,586
======== ======== ======== ==== ======= ===== ========
See accompanying notes to consolidated financial statements.
56
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(IN THOUSANDS)
2002 2001 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,596 $ 5,769 $ 4,550
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 912 856 988
Amortization of goodwill 167 167 167
Amortization of intangible assets 39 39 38
Deferred income taxes (693) (240) (360)
Net change in real estate loans originated for sale 39 (682) (277)
Deferred loan origination costs, net 576 184 (153)
Provision for loan losses 1,053 1,602 1,010
Federal Home Loan Bank stock dividend (362) (453) (337)
Net (gain) loss on sales of securities (216) 35 96
Gain on sale of loans -- (407) --
ESOP expense 454 -- --
Stock award earned -- -- 14
Increase in cash surrender value of life insurance (169) (63) --
Change in
Other assets (404) (623) 839
Accrued interest receivable 642 733 (577)
Accrued expenses and other liabilities 1,556 384 865
-------- -------- --------
Net cash provided by operating
activities 10,190 7,301 6,863
CASH FLOWS FROM INVESTING ACTIVITIES
Net loan principal originations (48,728) (65,430) (38,936)
Proceeds from sale of loans 20,083 54,547 --
Purchase of securities available-for-sale (47,269) (43,201) (120)
Proceeds from sales of securities available-
for-sale 9,670 6,955 18,625
Proceeds from maturities of securities
available-for-sale 39,265 40,825 --
Proceeds from repayment of securities
available-for-sale 1,754 2,199 2,891
Proceeds from sale of other real estate owned 1,573 -- --
Purchase of premises and equipment, net (270) (346) (295)
-------- -------- --------
Net cash used in investing activities (23,922) (4,451) (17,835)
(Continued)
57
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(IN THOUSANDS)
2002 2001 2000
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 17,605 $ 4,277 $ 53,670
Net increase (decrease) in mortgage escrow funds 722 (301) 526
Short-term borrowings (repayments), net 17,945 (16,054) (39,525)
Proceeds from long-term borrowings -- 15,000 10,000
Repayments of long-term borrowings (17,000) -- (10,000)
Proceeds from exercise of stock options,
net of treasury shares issued 3,420 974 452
Purchase of treasury stock (6,836) (9,503) (2,965)
Cash dividends paid (1,118) (1,192) (1,281)
-------- -------- --------
Net cash provided by (used in)
financing activities 14,738 (6,799) 10,877
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,006 (3,949) (95)
Cash and cash equivalents at beginning of year 6,573 10,522 10,617
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,579 $ 6,573 $ 10,522
======== ======== ========
Supplemental disclosures of cash flow information
Cash paid for
Interest $ 15,432 $ 23,568 $ 25,819
Income taxes 3,915 3,425 1,930
Transfer of loans to other real estate owned 1,573 997 663
See accompanying notes to consolidated financial statements.
58
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(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. From its three
locations, the Company provides a full line of financial services to corporate
and individual customers located in northern Illinois. 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, N.A. ("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 accounting principles
generally accepted in the United States of America 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. 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.
DERIVATIVES: The Company is involved in a certain derivative transaction that is
intended to protect and improve the predictability of certain future
transactions. The Company purchased an interest rate cap for $113,000 in October
2001. The term of the interest rate cap is from October 9, 2001 to October 12,
2004. The other party to the cap pays the Company on the $10,000,000 notional
amount to the extent the three-month treasury bill rate is greater than 4.50%.
The derivative instrument is recorded at its fair value and the change in the
fair value of the derivative is included in interest expense.
LOANS AND LOAN INCOME: Loans are reported net of the allowance for loan 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.
Interest income on mortgage and commercial loans is discontinued at the time the
loan is 90 days delinquent unless the credit is well-secured and in process of
collection. In all cases, loans are placed on nonaccrual or charged off at an
earlier date if collection of principal or interest is considered doubtful.
(Continued)
59
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
All interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. Interest received on such loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
The Company originates fixed-rate and variable-rate residential mortgage loans
for sale into the secondary market. Servicing rights are not retained on most
loans originated and sold by the Company. 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
banking 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.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors. Allocations
of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be charged-off.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage and consumer loans and on an individual loan basis
for other loans. If a loan is impaired, a portion of the allowance is allocated
so that the loan is reported, net, at the present value of estimated future cash
flows using the loan's existing rate or at the fair value of collateral if
repayment is expected solely from the collateral.
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.
GOODWILL: Goodwill resulted from a prior branch acquisition and represents the
excess of the purchase price over the fair value of acquired tangible assets and
liabilities and identifiable intangible assets. This acquisition was not
considered a business combination, and as a result, the goodwill is continuing
to be amortized. In addition, goodwill is assessed at least annually for
impairment, and any such impairment will be recognized in the period identified.
Goodwill expense is $167,000 per year and will be amortized for the next 6.5
years.
(Continued)
60
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
STOCK COMPENSATION: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings per
share if expense was measured using the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation. Certain
adjustments were made to the pro forma calculations in prior years to be
consistent with the current year presentation.
2002 2001 2000
---- ---- ----
Net income as reported $ 6,596 $ 5,769 $ 4,550
Deduct: Stock-based compensation expense
determined under fair value based method 199 285 242
--------- --------- ---------
Pro forma net income $ 6,397 $ 5,484 $ 4,308
========= ========= =========
Basic earnings per share as reported $ 1.93 $ 1.54 $ 1.14
Pro forma basic earnings per share 1.87 1.47 1.07
Diluted earnings per share as reported 1.84 1.50 1.12
Pro forma diluted earnings per share 1.78 1.42 1.06
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date:
2002 2001 2000
---- ---- ----
Fair value $ 5.30 $ 3.80 $ 3.19
Risk-free interest rate 4.4% 4.8% 6.3%
Expected option life 5 years 5 years 5 years
Expected stock price volatility 26% 31% 27%
Dividend yield 1.5% 2.1% 2.9%
COMPREHENSIVE INCOME: Comprehensive income includes both net income and other
comprehensive income elements, including the change in unrealized gains and
losses on securities available-for-sale, net of tax.
(Continued)
61
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EMPLOYEE STOCK OWNERSHIP PLAN: The cost of shares issued to the ESOP, but not
yet allocated to participants, is shown as a reduction of stockholders' equity.
Compensation expense is based on the market price of shares as they are
committed to be released. Dividends on unearned ESOP shares reduce debt and
accrued interest.
EARNINGS PER COMMON SHARE: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the period.
ESOP shares are considered outstanding for this calculation unless unearned.
Diluted earnings per common share includes the dilutive effect of additional
potential common shares issuable upon exercise of stock options.
DIVIDEND RESTRICTION: Banking regulations and the Company's line of credit
covenants require the maintenance of certain capital levels and may limit the
amount of dividends that may be paid by the Bank to the Company or by the
Company to stockholders.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS: Financial instruments include
off-balance-sheet credit instruments, such as commitments to make loans and
standby letters of credit, issued to meet customer financing needs. The face
amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are recorded
when they are funded.
STATEMENT OF CASH FLOWS: For the purpose of this statement, cash and cash
equivalents is defined to include cash on hand, demand balances with banks, 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.
LOSS CONTINGENCIES: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
OPERATING SEGMENTS: While the chief decision-makers monitor the revenue streams
of the various products and services, the identifiable segments are not material
and operations are managed and financial performance is evaluated on a
Company-wide basis. Accordingly, all of the financial service operations are
considered by management to be aggregated in one reportable operating segment.
NEWLY ISSUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS: New accounting
standards on asset retirement obligations, restructuring activities and exit
costs, operating leases, and early extinguishment of debt were issued in 2002.
Management determined that when the new accounting standards are adopted in
2003, they will not have a material impact on the Company's financial condition
or results of operations.
(Continued)
62
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECLASSIFICATIONS: Certain items in the financial statements as of and for the
years ended December 31, 2001 and 2000 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,
-----------------------
2002 2001 2000
---- ---- ----
Earnings per share
Net income $6,596 $5,769 $4,550
====== ====== ======
Weighted average common shares
outstanding, excluding unallocated
ESOP shares 3,422 3,737 4,008
====== ====== ======
Basic earnings per share $ 1.93 $ 1.54 $ 1.14
====== ====== ======
Earnings per share assuming dilution
Net income $6,596 $5,769 $4,550
====== ====== ======
Weighted average common shares
outstanding 3,422 3,737 4,008
Add dilutive effect of assumed exercises of
stock options and Bank incentive plan 169 112 56
------ ------ ------
Weighted average common and dilutive
potential common shares outstanding 3,591 3,849 4,064
====== ====== ======
Diluted earnings per share $ 1.84 $ 1.50 $ 1.12
====== ====== ======
(Continued)
63
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3 - SECURITIES
The fair value of securities available-for-sale and the related gross unrealized
gains and losses recognized in accumulated other comprehensive income were as
follows:
December 31, 2002
-----------------
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
-------- ------- --------
Securities
U.S. government agencies $ 33,040 $ 484 $ (4)
Marketable equity securities 2,389 514 (6)
States and political subdivisions 6,060 135 (17)
-------- ------- --------
41,489 1,133 (27)
Federal Home Loan Bank stock 7,212 -- --
Federal Reserve Bank stock 469 -- --
-------- ------- --------
$ 49,170 $ 1,133 $ (27)
======== ======= ========
December 31, 2001
-----------------
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
-------- ------- --------
Securities
U.S. government agencies $ 31,931 $ 437 $ (1)
Marketable equity securities 2,258 640 (72)
States and political subdivisions 6,708 113 --
-------- ------- --------
40,897 1,190 (73)
Mortgage-backed securities
Federal Home Loan Mortgage Corporation 3,948 141 --
Federal Home Loan Bank stock 6,850 -- --
Federal Reserve Bank stock 469 -- --
-------- ------- --------
$ 52,164 $ 1,331 $ (73)
======== ======= ========
Proceeds from sales of securities available-for-sale and gross realized gains
and losses are as follows:
2002 2001 2000
---- ---- ----
Proceeds from sales $ 9,670 $ 6,955 $ 18,625
Gross realized gains 217 7 8
Gross realized losses (1) (42) (104)
(Continued)
64
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3 - SECURITIES (Continued)
At December 31, 2002 and 2001, securities with an approximate carrying value of
$35,801,000 and $42,587,000 were pledged to secure deposits, Federal Home Loan
Bank advances, and other borrowings. Included in securities pledged at December
31, 2002 and 2001 is $21,800,000 and $20,633,000 that has been pledged for FHLB
borrowings.
The fair value of securities available-for-sale at December 31, 2002, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to prepay with or
without prepayment penalties.
Fair
Value
-----
Securities available-for-sale
Due in one year or less $ 5,890
Due after one year through five years 33,210
Federal Home Loan Bank stock 7,212
Federal Reserve Bank stock 469
Marketable equity securities 2,389
----------
$ 49,170
==========
NOTE 4 - LOANS RECEIVABLE
Loans receivable at December 31 are summarized as follows:
2002 2001
---- ----
Commercial loans and leases
Commercial loans $ 56,519 $ 46,770
Construction 54,587 58,933
Commercial real estate 84,552 79,403
Multi-family loans 252,165 222,556
Commercial leases 522 1,774
--------- ---------
448,345 409,436
Net deferred loan origination costs 753 1,218
--------- ---------
Total commercial loans and leases 449,098 410,654
--------- ---------
Mortgage loans
Secured by one-to-four-family residences 54,459 58,486
Loans held for sale 1,026 1,065
--------- ---------
55,485 59,551
Net deferred loan origination fees (422) (311)
--------- ---------
Total mortgage loans 55,063 59,240
--------- ---------
Consumer loans
Home equity and improvement 28,837 33,460
Automobile 7,292 10,661
Other 1,773 2,152
--------- ---------
37,902 46,273
--------- ---------
$ 542,063 $ 516,167
========= =========
(Continued)
65
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4 - LOANS RECEIVABLE (Continued)
Loans serviced for the Federal Home Loan Mortgage Corporation ("FHLMC")
approximated $38,093,000, $65,972,000, and $73,326,000 at December 31, 2002,
2001, and 2000.
The Bank had lending transactions with directors and executive officers of the
Company and the Bank which totaled approximately $763,000 and $215,000 at
December 31, 2002 and 2001.
A portion of the allowance for loan losses is allocated to impaired loans.
Information with respect to impaired loans and the related allowance for loan
losses is as follows:
December 31,
------------
2002 2001
---- ----
Impaired loans for which no allowance for loan losses
is allocated $ 918 $ --
Impaired loans with an allocation of the allowance for
loan losses 3,016 1,588
----------- ------
Total impaired loans $ 3,934 $1,588
=========== ======
Allowance for loan losses allocated to impaired loans $ 300 $ 397
=========== ======
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Average impaired loans $ 4,352 $ 1,818 $ 798
Interest income recognized on impaired loans -- -- --
Nonperforming loans were as follows:
2002 2001
---- ----
Loans past due over 90 days still on accrual $ 1,468 $ 239
Nonaccrual loans 3,934 2,299
Nonperforming loans and impaired loans are defined differently. Some loans may
be included in both categories, whereas other loans may only be included in one
category.
(Continued)
66
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4 - LOANS RECEIVABLE (Continued)
Activity in the allowance for loan losses is summarized as follows for the years
ended December 31:
2002 2001 2000
---- ---- ----
Balance at beginning of year $ 6,547 $ 5,655 $ 4,833
Provision for loan losses 1,053 1,602 1,010
Recoveries 53 37 50
Loans charged-off (614) (747) (238)
----------- ----------- -----------
Net charge-offs (561) (710) (188)
----------- ----------- -----------
Balance at end of year $ 7,039 $ 6,547 $ 5,655
=========== =========== ===========
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows:
2002 2001
---- ----
Cost
Land $ 1,656 $ 1,656
Buildings 10,090 10,032
Furniture, fixtures, and equipment 5,202 5,047
----------- -----------
16,948 16,735
Less accumulated depreciation and amortization 8,124 7,269
----------- -----------
$ 8,824 $ 9,466
=========== ===========
NOTE 6 - DEPOSITS
Certificates of deposit accounts of $100,000 and over totaled $109,888,000 and
$94,969,000 at December 31, 2002 and 2001. At December 31, 2002, stated
maturities of all certificates of deposit were:
2003 $ 167,152
2004 34,847
2005 11,751
2006 8,443
2007 2,367
Thereafter 254
-----------
$ 224,814
===========
(Continued)
67
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7 - BORROWINGS
Borrowings at December 31 are summarized as follows:
2 0 0 2 2 0 0 1
------- -------
Weighted Weighted
Average Average
Rate Amount Rate Amount
---- ------ ---- ------
Short-term borrowings
Advances from the Federal Home
Loan Bank due in less than
one year 3.39% $ 35,200 5.28% $ 18,000
Securities sold under
repurchase agreements 1.54 5,847 2.13 7,586
Line of credit 3.75 100 4.00 3,700
Other borrowings 1.32 6,223 1.25 139
------------ -----------
$ 47,370 $ 29,425
============ ===========
Long-term borrowings
Advances from Federal Home
Loan Bank due
2003 --% $ -- 4.48% $ 17,000
2004 3.74 12,000 3.74 12,000
2006 4.30 5,000 4.30 5,000
2008 4.95 10,000 4.95 10,000
------------ -----------
$ 27,000 $ 44,000
============ ===========
The Bank maintains a collateral pledge agreement covering secured advances
whereby the Bank has specifically pledged $54,714,000 of first mortgages on
improved residential property, free of all other pledges, liens, and
encumbrances (not more than 90 days delinquent), and $37,155,000 of eligible
segregated multi-family loans. Various securities are also pledged as
collateral.
As of December 31, 2002 and 2001, advances having a call option by the Federal
Home Loan Bank totaled $15,000,000 and $15,000,000. The $10,000,000 advance, due
in 2008, is callable quarterly beginning on April 15, 2001, while the $5,000,000
advance, due in 2006, has a one-time call on July 23, 2003.
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 that allows the
Company to accept U.S. Treasury deposits of excess funds along with deposits of
customer taxes. This borrowing has an interest rate that adjusts weekly. Various
securities are pledged as collateral.
(Continued)
68
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7 - BORROWINGS (Continued)
The Company has a $5,000,000 revolving line of credit, with $100,000 outstanding
at December 31, 2002. The revolving line of credit matures on June 27, 2003 with
interest payments due quarterly at the rate equal to either the higher of prime
rate or 3.75% or the higher of 30-, 60-, 90-day LIBOR plus 150 basis points or
3.75%. In no event will the interest rate be less than 3.75%. The revolving line
of credit also includes the following covenants at December 31, 2002: (1) the
Bank must not have non-performing assets in excess of 25% of Tier 1 capital plus
the loan loss allowance; (2) the Bank must be considered well capitalized; (3)
the ratio of allowance for loan losses to non-performing loans for the Bank must
not be less than 100% at all times; and (4) consolidated return on assets must
be at least .65% at the end of every calendar year. The Company had complied
with these covenants at December 31, 2002.
NOTE 8 - INCOME TAXES
The income tax provision for the years ended December 31 is summarized as
follows:
2002 2001 2000
---- ---- ----
Current
Federal $ 4,066 $ 2,984 $ 2,444
State 533 547 421
Deferred (693) (240) (360)
----------- ----------- -----------
$ 3,906 $ 3,291 $ 2,505
=========== =========== ===========
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:
2002 2001 2000
---- ---- ----
Expected income tax expense at federal
tax rate $ 3,571 $ 3,080 $ 2,406
State income tax, net of federal tax benefit 411 341 236
Tax exempt interest income on securities
and loans (66) (84) (95)
Increase in cash surrender value of director
life insurance (32) (21) (25)
Other 22 (25) (17)
----------- ----------- -----------
$ 3,906 $ 3,291 $ 2,505
=========== =========== ===========
(Continued)
69
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8 - INCOME TAXES (Continued)
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:
2002 2001
------- -------
Gross deferred tax assets
Bad debt deduction $ 2,526 $ 2,135
Deferred compensation and employee benefits 911 841
Non-accrual loan interest 178 --
Other 88 127
------- -------
3,703 3,103
Gross deferred tax liabilities
Depreciation (428) (442)
FHLB stock dividends (664) (520)
Deferred loan fees and costs (859) (1,045)
Mortgage servicing rights (50) (86)
Unrealized gain on securities available-for-sale (428) (489)
------- -------
(2,429) (2,582)
------- -------
Net deferred tax asset $ 1,274 $ 521
======= =======
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.
(Continued)
70
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9 - COMMITMENTS, CONTINGENT LIABILITIES, AND CONCENTRATIONS
(Continued)
At December 31, 2002 and 2001, these financial instruments are summarized as
follows:
Amount
------
2002 2001
------- --------
Off-balance-sheet financial instruments whose contract
amounts represent credit risk
Commitments to extend credit - fixed/variable rate $12,248 $ 16,637
Letters of credit 7,572 9,490
Unused lines of credit 90,441 131,960
The fixed-rate commitments have a rate of 7.25% at December 31, 2002. Since
certain commitments to make loans and fund lines of credit may 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.
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 are asset growth and expansion, and plans for
capital restoration are required.
(Continued)
71
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10 - CAPITAL REQUIREMENTS (Continued)
At December 31, 2002 and 2001, the Bank's and the Company's regulators
categorized the Bank and the Company as well capitalized. There are no
conditions or events since that notification that management believes have
changed the capital category of the Bank or the Company. Actual capital levels
(in millions) and minimum required levels were:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provisions
------ ---------------- -----------------
2002 Amount Ratio Amount Ratio Amount Ratio
- ---- ------ ----- ------ ----- ------ -----
Total capital
(to risk-weighted assets)
Company $52.2 12.0% $34.7 8.0% $43.4 10.0%
Bank 50.1 11.6 34.6 8.0 43.3 10.0
Tier 1 capital
(to risk-weighted assets)
Company 46.8 10.8 17.4 4.0 26.0 6.0
Bank 44.6 10.3 17.3 4.0 26.0 6.0
Tier 1 capital
(to average assets)
Company 46.8 7.7 24.2 4.0 30.2 5.0
Bank 44.6 7.4 24.0 4.0 30.0 5.0
2001
Total capital
(to risk-weighted assets)
Company $48.3 11.7% $33.1 8.0% $41.4 10.0%
Bank 49.3 11.9 33.1 8.0 41.3 10.0
Tier 1 capital
(to risk-weighted assets)
Company 43.0 10.4 16.6 4.0 24.9 6.0
Bank 44.0 10.6 16.5 4.0 24.8 6.0
Tier 1 capital
(to average assets)
Company 43.0 7.3 23.5 4.0 29.4 5.0
Bank 44.0 7.5 23.4 4.0 29.2 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 the prior two years'
undistributed net income, as long as the institution remains well capitalized
after the proposed distribution. At December 31, 2002, approximately $395,000 is
available to pay dividends from the Bank to the Company.
(Continued)
72
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
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, 2002 and 2001, 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,
2002 and 2001, 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,
2002 and 2001 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, 2002 At December 31, 2001
-------------------- --------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
-------- --------- -------- ---------
Financial instrument assets
Cash on hand and in banks $ 7,562 $ 7,562 $ 6,552 $ 6,552
Interest-bearing deposits in other
financial institutions 17 17 21 21
Securities available-for-sale 49,170 49,170 52,164 52,164
Loans receivable, net 535,024 536,448 509,620 511,432
Accrued interest receivable 2,639 2,639 3,281 3,281
Financial instrument liabilities
NOW, money market, and
passbook savings 248,793 248,793 226,337 226,337
Certificates of deposits 224,814 228,854 229,665 232,790
Short-term borrowings 47,370 47,370 29,425 29,425
Long-term borrowings from
Federal Home Loan Bank 27,000 28,395 44,000 43,180
Advances from borrowers for
taxes and insurance 5,587 5,587 4,865 4,865
Accrued interest payable 757 757 899 899
(Continued)
73
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(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, 2002 and 2001, the fair values would
have been achieved, because the market value may differ depending on the
circumstances. The estimated fair values at December 31, 2002 and 2001 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 at 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 2002, 2001, and 2000 was $113,000, $93,000, and $96,000.
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 2002, options for 51,000 shares were granted at exercise prices of $18.75
to $20.65 per share and are fully vested after varying lengths of time
(immediate to 3 years). During 2001, options for 64,876 shares were granted at
exercise prices of $11.75 to $12.48 per share and are fully vested after varying
lengths of time (immediate to 3 years). During 2000, options for 67,628 shares
were granted at exercise prices of $10.44 to $13.29 per share and are fully
vested after varying lengths of time (immediate to 3 years).
(Continued)
74
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12 - EMPLOYEE BENEFIT PLANS (Continued)
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
--------- -------- -----
2000 67,628 $ 11.87 $ 3.19
2001 64,876 11.94 3.80
2002 51,000 18.94 5.30
The activity in the stock option plans for 2002, 2001, and 2000 is summarized as
follows:
Weighted
Number Average
of Exercise
Options Price
------- ---------
Outstanding at January 1, 2000 979,170 $ 11.78
Granted 67,628 11.87
Exercised (74,517) (6.07)
Forfeited (127,707) (12.73)
--------
Outstanding at December 31, 2000 844,574 12.15
Granted 64,876 11.94
Exercised (101,638) (9.02)
Forfeited -- --
--------
Outstanding at December 31, 2001 807,812 12.53
Granted 51,000 18.94
Exercised (254,210) (11.50)
Forfeited (13,908) (14.63)
--------
Outstanding at December 31, 2002 590,694 $ 13.47
======== ========
(Continued)
75
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12 - EMPLOYEE BENEFIT PLANS (Continued)
Options exercisable at year end are as follows:
Weighted
Number Average
of Exercise
Options Price
------- ---------
December 31, 2000 440,638 $ 11.10
December 31, 2001 545,089 12.09
December 31, 2002 455,004 13.07
At year-end 2002, options outstanding were as follows:
Outstanding Exercisable
----------- -----------
Weighted Average Weighted
Range of Remaining Average
Exercise Contractual Exercise
Prices Number Life Number Price
------ ------ ---- ------ -----
$ 8.55 - 10.00 76,500 2.5 years 76,500 $ 8.88
10.01 - 15.00 389,694 6.3 years 311,379 13.15
15.01 - 18.75 119,500 6.5 years 65,875 17.40
18.76 - 20.65 5,000 9.0 years 1,250 20.65
-------- ----------- -------- ---------
Outstanding at year end 590,694 5.9 years 455,004 $ 13.07
======== =========== ======== =========
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.
All of the BIP 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. 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 and all of the shares were
allocated. In 2002, the ESOP borrowed $1,500,000 from the Company to purchase an
additional 81,477 shares of stock at $18.41 per share. The Company makes
discretionary contributions to the ESOP, as well as paying dividends on
unallocated shares to the ESOP, and the ESOP uses funds it receives to repay the
loan. When loan payments are made, ESOP shares are allocated to participants.
(Continued)
76
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12 - EMPLOYEE BENEFIT PLANS (Continued)
Shares held by the ESOP were as follows:
2002 2001
---- ----
---------- --------
Allocated to participants 305,456 316,414
Unearned 69,198 --
---------- --------
Total ESOP shares 374,654 316,414
========== ========
Fair value of unearned shares $1,939,000 $ --
========== ========
Contributions to the ESOP during 2002, 2001, and 2000 were $272,000, $145,000,
and $0.
Other Benefit Plan
Prior to 2002, the Company provided certain postretirement health care benefits
for employees. Employees could become eligible based on the number of years of
service and if they reached normal retirement age while working for the Company.
In 2002, this plan was frozen and benefits will only be provided to current
retirees. In addition, the Company has a Directors' deferred compensation plan.
These plans are accounted for in accordance with Statement of Financial
Accounting Standards No. 106, "Employers Accounting for Postretirement Benefits
Other Than Pensions." At December 31, 2002, 2001, and 2000, the APBO for all of
the plans was $1,262,000, $1,048,000, and $1,062,000, and the postretirement
benefit cost for the years ended December 31, 2002, 2001, and 2000 was $390,000,
$136,000, and $253,000. 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.
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 75). The liability for each covered
director is being accrued over the vesting period. Expense of $78,000, $78,000,
and $78,000, has been included in compensation and benefits in the accompanying
consolidated statements of income for the years ended December 31, 2002, 2001,
and 2000. The Company is the beneficiary of life insurance policies on the
directors with an aggregate face value of approximately $3,300,000 at December
31, 2002. In addition, the policies had aggregate cash surrender values of
approximately $933,000 and $764,000 at December 31, 2002 and 2001, which are
included in other assets.
(Continued)
77
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13 - PARENT-COMPANY-ONLY FINANCIAL STATEMENTS
Presented below are the condensed statements of financial condition, condensed
statements of income, and condensed statements of cash flows for CoVest
Bancshares, Inc.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31, 2002 and 2001
2002 2001
-------- --------
ASSETS
Cash in banks $ 153 $ 78
Securities available-for-sale 2,281 2,042
Investment in Bank 46,171 45,905
Other assets 1,847 883
-------- --------
$ 50,452 $ 48,908
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable $ 100 $ 3,700
Other liabilities 1,766 57
-------- --------
1,866 3,757
Stockholders' equity
Common stock 44 44
Additional paid in capital 18,831 17,268
ESOP loans (1,202) --
Retained earnings 46,838 41,360
Treasury stock, at cost (16,603) (14,290)
Accumulated other comprehensive income 678 769
-------- --------
48,586 45,151
-------- --------
$ 50,452 $ 48,908
======== ========
(Continued)
78
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13 - PARENT-COMPANY-ONLY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 2002, 2001, and 2000
2002 2001 2000
------- ------- -------
Operating income
Interest on investments $ 115 $ 56 $ 19
Dividends received from subsidiary 6,656 6,552 3,958
Gain (loss) on sale of investments 32 (20) --
Other income 35 -- --
Interest expense (67) (41) --
Other expense (344) (220) (211)
------- ------- -------
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS
OF SUBSIDIARY 6,427 6,327 3,766
Equity in undistributed earnings of subsidiary 169 (558) 784
------- ------- -------
NET INCOME $ 6,596 $ 5,769 $ 4,550
======= ======= =======
(Continued)
79
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(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, 2002, 2001, and 2000
2002 2001 2000
---- ---- ----
OPERATING ACTIVITIES
Net income $ 6,596 $ 5,769 $ 4,550
Adjustments to reconcile net income to
net cash provided by operating activities
Excess in undistributed
earnings of subsidiary (169) 558 (784)
ESOP expense 454 -- --
Loss (gain) on sale of securities (32) 20 --
Change in
Other assets (964) 208 110
Other liabilities 2,472 46 (197)
----------- ----------- -----------
Net cash provided by operating activities 8,357 6,601 3,679
INVESTING ACTIVITIES
Purchase of securities (634) (775) (120)
Proceeds from sales of securities 486 226 --
----------- ----------- -----------
Net cash used in investing activities (148) (549) (120)
FINANCING ACTIVITIES
Repayments of note payable (3,600) 3,700 --
Exercise of stock options, net of treasury
shares issued 3,420 974 452
Purchase of treasury stock (6,836) (9,503) (2,965)
Cash dividend paid (1,118) (1,192) (1,281)
----------- ----------- -----------
Net cash used in financing activities (8,134) (6,021) (3,794)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 75 31 (235)
Cash and cash equivalents at beginning of year 78 47 282
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 153 $ 78 $ 47
=========== =========== ===========
(Continued)
80
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 14 - OTHER COMPREHENSIVE INCOME (LOSS)
Changes in other comprehensive income (loss) components and related taxes are as
follows:
Years Ended December 31,
------------------------
2002 2001 2000
---- ---- ----
Unrealized holding gains on
securities available-for-sale $ 64 $ 1,305 $ 1,253
Less reclassification adjustment for net gains
(losses) recognized in income 216 (35) (96)
----------- ----------- -----------
Net unrealized gains (losses) (152) 1,340 1,349
Tax effect 61 (521) (522)
----------- ----------- -----------
Other comprehensive income (loss) $ (91) $ 819 $ 827
=========== =========== ===========
NOTE 15 - COMMON STOCK AND TREASURY STOCK
An analysis of changes in the number of shares of common stock and treasury
stock outstanding follows:
2002 2001 2000
---- ---- ----
Common Stock
Balance at January 1 4,403,803 4,403,803 4,403,803
Shares issued for stock options -- -- --
----------- ----------- -----------
Balance at December 31 4,403,803 4,403,803 4,403,803
=========== =========== ===========
Treasury Stock
Balance at January 1 965,580 494,162 299,796
Stock options exercised (254,210) (101,638) (74,517)
Shares issued to ESOP (81,477) -- --
Treasury stock purchases 293,529 573,056 268,883
----------- ----------- -----------
Balance at December 31 923,422 965,580 494,162
=========== =========== ===========
(Continued)
81
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 16 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Three Months Ended
------------------
2002 March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Interest income $ 9,639 $ 9,101 $ 8,902 $ 8,919
Interest expense 4,037 3,961 3,815 3,477
----------- ----------- ----------- -----------
NET INTEREST INCOME 5,602 5,140 5,087 5,442
Provision for loan losses 472 164 217 200
Noninterest income 1,236 1,253 1,146 1,308
Noninterest expense 3,818 3,573 3,326 3,942
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,548 2,656 2,690 2,608
Income tax provision 935 976 982 1,013
----------- ----------- ----------- -----------
NET INCOME $ 1,613 $ 1,680 $ 1,708 $ 1,595
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE
Basic(a) $ .47 $ .49 $ .50 $ .47
Diluted(a) .45 .47 .48 .44
2001
Interest income $ 11,318 $ 10,753 $ 10,541 $ 10,231
Interest expense 6,636 5,940 5,573 4,696
----------- ----------- ----------- -----------
NET INTEREST INCOME 4,682 4,813 4,968 5,535
Provision for loan losses 250 250 300 802(b)
Noninterest income 1,118 1,147 956 1,024
Noninterest expense 3,292 3,659 3,318 3,312
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,258 2,051 2,306 2,445
Income tax provision 823 739 832 897
----------- ----------- ----------- -----------
NET INCOME $ 1,435 $ 1,312 $ 1,474 $ 1,548
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE
Basic(a) $ .37 $ .34 $ .39 $ .45
Diluted(a) .37 .33 .37 .43
(a) Earnings per share for the quarters and fiscal years have been calculated
separately. Accordingly, quarterly amounts may not add to the annual
amounts because of differences in the average common shares outstanding
during each period.
(b) The increase in the provision for loan losses in the three months ended
December 31, 2001 is due to an increase in charge-offs, a continued change
in the mix of the loan portfolio, and the weakening economy.
(Continued)
82
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 17 - ACQUISITION
On November 1, 2002, CoVest Bancshares, Inc. ("CoVest") entered into a
definitive agreement with Midwest Banc Holdings, Inc. ("MBHI"). The agreement
calls for MBHI to acquire CoVest in a stock and cash merger transaction.
Stockholders of CoVest will receive .925 shares of MBHI common stock and $10.25
in cash for each share of CoVest for an estimated price of $105.2 million. The
proposed merger is subject to regulatory approval and the approval of the
Company's stockholders. The transaction is expected to close in the second
quarter of 2003.
NOTE 18 - STOCKHOLDERS' RIGHTS PLAN
On July 28, 1997, the Company's Board of Directors adopted a Stockholders'
Rights Plan. The Plan provided for the distribution of one Right on August 25,
1997, for each share of the Company's outstanding common stock as of August 11,
1997. The Rights have no immediate economic value to stockholders because they
cannot be exercised unless and until a person, group or entity acquires 15% or
more of the Company's common stock or announces a tender offer. The Plan also
permits the Company's Board of Directors to redeem each Right for one cent under
various circumstances. In general, the Rights Plan provides that if a person,
group or entity acquires a 15% or larger stake in the Company or announces a
tender offer, and the Company's Board chooses not to redeem the Rights, all
holders of Rights, other than the 15% stockholder or the tender offeror, will be
able to purchase a certain amount of the Company's common stock for half of its
market price. The Company amended the Stockholders' Rights Plan as of October
31, 2002 to exclude the proposed merger transaction between the Company and
Midwest Banc Holdings, Inc. from the terms of the Plan.
(Continued)
83
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 2003 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 2002.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the 2003 Annual
Meeting of Stockholders, except for information contained under the headings
"Compensation Committee Report on Executive Compensation," "Performance Graph"
and "Audit Committee's Report," which are furnished for the information of the
Commission and are not deemed to be "filed" as part of the Form 10-K.
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 2003 Annual Meeting of Stockholders.
EQUITY COMPENSATION PLAN INFORMATION
The table below sets forth the following information as of December 31,
2002 for (i) all compensation plans previously approved by the Company's
shareholders and (ii) all compensation plans not previously approved by
the Company's shareholders:
(a) the number of securities to be issued upon the exercise of
outstanding options, warrants and rights;
(b) the weighted-average exercise price of such outstanding
options, warrants and rights;
(c) other than securities to be issued upon the exercise of such
outstanding options, warrants and rights, the number of
securities remaining available for future issuance under the
plans.
84
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES TO BE
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE NUMBER OF SECURITIES REMAINING
PLAN CATEGORY OUTSTANDING OPTIONS PRICE OF OUTSTANDING OPTIONS AVAILABLE FOR FUTURE ISSUANCE
- ------------- ------------------- ---------------------------- -----------------------------
Equity compensation plans approved
by security holders............... 250,000 $12.55 0
Equity compensation plans not
approved by security holders...... 340,694 $14.15 30,662
TOTAL............................. 590,694 $13.47 30,662
(1) In 1996 the Company adopted the CoVest Bancshares, Inc. 1996 Stock Option
and Incentive Plan (the "Plan"). The Plan authorized the granting of options,
restricted stock, stock appreciation rights and limited stock appreciation
rights with respect to 414,000 shares of common stock, which number was
increased by a later amendment. The Plan is administered by a committee which
consists solely of two or more non-employee directors. All options granted
pursuant to the Plan have had an exercise price equal to the fair market value
of the Company's common stock on the date of grant. All options are subject to a
vesting schedule and are forfeited upon a termination for cause.
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 2003 Annual Meeting of Stockholders.
ITEM 14. CONTROLS AND PROCEDURES
Based upon an evaluation within the 90 days prior to the filing date
of this report, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls
and procedures are effective. There have been no significant changes
in the Company's internal controls or in other factors that could
significantly affect the Company's internal controls subsequent to
the date of the evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
85
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 - Certificate of Chief Executive Officer
99.2 - Certificate of Chief Financial Officer
(b) Reports on Form 8-K
A report on Form 8-K was filed on October 29, 2002 to report under Item 5, Other
Events, that the Company issued a press release pertaining to third quarter 2002
results.
A report on Form 8-K was filed on November 4, 2002 to report under Item 5, Other
Events, that the Company and Midwest Banc Holding, Inc. entered into an
Agreement and Plan of Reorganization.
A report on Form 8-K was filed on November 26, 2002 to report under Item 5,
Other Events, that the Company announced a regular quarterly dividend.
86
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 27, 2003 Date: March 27, 2003
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, Jr. By: /s/ James L. Roberts
-------------------------------- -------------------------------
Frank A. Svoboda, Jr., James L. Roberts, President,
Chairman of the Board Chief Executive Officer and Director
Date: March 27, 2003 Date: March 27, 2003
By: /s/ George T. Drost By: /s/ David M. Miller
-------------------------------- -------------------------------
George T. Drost, Director David M. Miller, Director
Date: March 27, 2003 Date: March 27, 2003
By: /s/ Gerald T. Niedert By: /s/ David B. Speer
-------------------------------- -------------------------------
Gerald T. Niedert, Director David B. Speer, Director
Date: March 27, 2003 Date: March 27, 2003
87
I, James L. Roberts, Chief Executive Officer of the Company, certify that:
1) I have reviewed this annual report on Form 10-K of CoVest Bancshares,
Inc.;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003
/s/ JAMES L. ROBERTS
James L. Roberts
Chief Executive Officer
88
I, Paul A. Larsen, Chief Financial Officer of the Company, certify that:
1) I have reviewed this annual report on Form 10-K of CoVest Bancshares,
Inc.;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003
/s/ PAUL A. LARSEN
Paul A. Larsen
Chief Financial Officer
89
Exhibit Index
To
Annual Report of Form 10-K
EXHIBIT NO. DESCRIPTION INCORPORATED HEREIN BY REFERENCE FILED HEREWITH
- ----------- ----------- -------------------------------- --------------
3.1 Certificate of Exhibit 3.1 to the Registration
Incorporation of CoVest Statement on Form S-1 filed with the
Bancshares, Inc. Commission by CoVest Bancshares on
April 1, 1992, as amended (SEC File
No. 33-46909)
3.2 Amendment to Certificate of Exhibit 3.2 to the 1997 10-K filed
Incorporation of CoVest with the Commission by CoVest
Bancshares, Inc. Bancshares on March 24, 1998
(Commission File No. 0-20160)
3.3 Bylaws of CoVest Bancshares, Inc. Exhibit 3.2 to the Registration
Statement of Form S-1 filed with the
Commission by CoVest Bancshares on
April 1, 1992, as amended
(SEC File No. 33-46909)
4.1 Specimen Stock Certificate of Exhibit 4.1 to the 1997 10-K filed
CoVest Bancshares, Inc. with the Commission by CoVest
Bancshares on March 24, 1998
(Commission File No. 0-20160)
10.1 Stock Option and Incentive Plan Exhibit 10.1 to the Registration
Statement of Form S-1 filed with the
Commission by CoVest Bancshares on
April 1, 1992, as amended
(SEC File No. 33-46909)
10.2 Bank Incentive Plan and Exhibit 10.4 to the Registration
Trusts Statement of Form S-1 filed with the
Commission by CoVest Bancshares on
April 1, 1992, as amended
(SEC File No. 33-46909)
10.3 Employee Stock Ownership Plan Exhibit 10.5 to the Registration
Statement of Form S-1 filed with the
Commission by CoVest Bancshares on
April 1, 1992, as amended (SEC File
No. 33-46909)
10.4 Profit Sharing/401(k) Plan and Exhibit 10.1 and 10.2 to the March
Trust Agreement 31, 1995 10-Q, file with the
Commission by CoVest Bancshares on
May 11, 1995 (Commission File No.
0-20160)
10.5 Amendment 1995-1 to CoVest Exhibit 10.1 to the June 30, 1995
Bancshares, Inc. 1992 Stock 10-Q, filed with the Commission by
Option and Incentive Plan CoVest Bancshares on August 8, 1995
(Commission File No. 0-20160)
10.6 Amendment 1997-1 to CoVest Exhibit 10.9 to the 1997 10-K filed
Bancshares, Inc. 1992 Stock with the Commission by CoVest
Option and Incentive Plan Bancshares on March 24, 1998
(Commission File No. 0-20160)
10.7 1996 Stock Option and Incentive Exhibit 10.10 to the 1997 10-K filed
Plan with the Commission by CoVest
Bancshares on March 24, 1998
(Commission File No. 0-20160)
90
10.8 Amendment 1997-1 to 1996 Stock Exhibit 10.11 to the 1997 10-K filed
Option and Incentive Plan with the Commission by CoVest
Bancshares on March 24, 1998
(Commission File No. 0-20160)
10.9 Employment Agreement between Exhibit 10.11 to the 1998 10-K filed
CoVest Bancshares, Inc. and with the Commission by CoVest
James L. Roberts, dated January Bancshares on March 22, 1999
20, 1999 (Commission File No. 0-20160)
10.10 Non-Qualified Stock Option Exhibit 10.12 to the 1998 10-K filed
Agreement between CoVest with the Commission by CoVest
Bancshares, Inc. and James L. Bancshares on March 22, 1999
Roberts, dated January 20, 1999 (Commission File No. 0-20160)
10.11 Agreement Regarding Post Exhibit 10.13 to the 1998 10-K filed
Employment Restrictive Covenants with the Commission by CoVest
between CoVest Bancshares, Inc., Bancshares on March 22, 1999
CoVest Banc, National (Commission File No. 0-20160)
Association, and James L.
Roberts, dated January 20, 1999
10.12 Employment Agreement between Exhibit 10.13 to the 1999 10-K filed
CoVest Bancshares, Inc. and Paul with the Commission by CoVest
A. Larsen, dated April 27, 1999 Bancshares on March 21, 2000
(Commission File No. 0-20160)
10.13 Agreement Regarding Post Exhibit 10.13 to the 1999 10-K filed
Employment Restrictive Covenants with the Commission by CoVest
between CoVest Bancshares, Inc., Bancshares on March 21, 2000
CoVest Banc, National (Commission File No. 0-20160)
Association, and Paul A. Larsen,
dated April 27, 1999
10.14 Employment Agreement between Exhibit 10.13 to the 1999 10-K filed
CoVest Bancshares, Inc. and J. with the Commission by CoVest
Stuart Boldry, Jr., dated Bancshares on March 21, 2000
December 31, 1999 (Commission File No. 0-20160)
10.15 Agreement Regarding Post Exhibit 10.13 to the 1999 10-K filed
Employment Restrictive Covenants with the Commission by CoVest
between CoVest Bancshares, Inc., Bancshares on March 21, 2000
CoVest Banc, National (Commission File No. 0-20160)
Association, and J. Stuart
Boldry, Jr., dated December 31,
1999
10.16 ESOP Loan Agreement, dated Schedule 13/A filed with the
February 22, 2002 Commission on February 26, 2002 (SEC
File No. 005-43680)
10.17 Amendment 2002-1 to 1992 Stock Exhibit 10.1 to the June 30, 2002
Option and Incentive Plan 10Q, file with the Commission by
CoVest Bancshares on July 23, 2002
(Commission File No. 0-20160)
10.18 Amendment 2002-1 to 1996 Stock Exhibit 10.2 to the June 30, 2002
Option and Incentive Plan 10Q, file with the Commission by
CoVest Bancshares on July 23, 2002
(Commission File No. 0-20160)
10.19 Amendment to Employment Exhibit 10.3 to the June 30, 2002
Agreement between CoVest 10Q, file with the Commission by
Bancshares, Inc. and James L. CoVest Bancshares on July 23, 2002
Roberts dated January 20, 1999 (Commission File No. 0-20160)
10.20 Amendment to Employment Exhibit 10.4 to the June 30, 2002
Agreement between CoVest 10Q, file with the Commission by
Bancshares, Inc. and Paul A. CoVest Bancshares on July 23, 2002
Larsen dated April 27, 1999 (Commission File No. 0-20160)
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10.21 Amendment to Regarding Post Exhibit 10.5 to the June 30, 2002
Employment Restrictive 10Q, file with the Commission by
Covenants between CoVest CoVest Bancshares on July 23, 2002
Bancshares, Inc., CoVest Banc (Commission File No. 0-20160)
National Association and Paul
A. Larsen dated April 27, 1999
10.22 Amendment to Regarding Post Exhibit 10.6 to the June 30, 2002
Employment Restrictive Covenants 10Q, file with the Commission by
between CoVest Bancshares, Inc., CoVest Bancshares on July 23, 2002
CoVest Banc National (Commission File No. 0-20160)
Association and J. Stuart
Boldry, Jr. dated December 31,
1999
10.23 Change of Control and Exhibit 10.7 to the June 30, 2002
Non-Compete Agreement between 10Q, file with the Commission by
CoVest Bancshares, Inc. and CoVest Bancshares on July 23, 2002
Joseph J. Gillings dated June 4, (Commission File No. 0-20160)
2002
10.24 Agreement and Plan of Exhibit 2.1 to the Form 8-K, filed
Reorganization with Midwest Banc with the Commission by CoVest
Holdings, Inc., dated November Bancshares on November 4, 2002
1, 2002 (Commission File No. 0-20160)
21.1 Subsidiaries of the Registrant Exhibit 21.1 to the 1997 10-K filed
with the Commission by CoVest
Bancshares on March 24, 1998
(Commission File No. 0-20160)
23.1 Consent of Crowe, Chizek and
Company LLP X
99.1 Proxy Statement and Proxy Schedule 14A filed with the
(except such portions Commission on March 28, 2003
incorporated by reference into
this Form 10-K, such materials
shall not be deemed to be
"filed" with the Commission)
99.2 Certification Pursuant to 18
U.S.C. Section 1350, as adopted
pursuant to section 906 of the X
Sarbanes-Oxley Act of 2002 by
James L. Roberts
99.3 Certification Pursuant to 18
U.S.C. Section 1350, as adopted
pursuant to section 906 of the X
Sarbanes-Oxley Act of 2002 by
Paul A. Larsen
92