10-Q 1 t10q093003.txt THIRD QUARTER 2003 EARNINGS UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM 10-Q Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended Commission File Number September 30, 2003 0-20160 ------------------------------ COVEST BANCSHARES, INC. (Exact name of registrant as specified in its charter) Delaware 36-3820609 (State or other jurisdiction (I.R.S. Employer Identification of incorporation or Number) organization) 749 Lee Street, Des Plaines, Illinois 60016 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (847) 294-6500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes --X-- No ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ----- No --X-- As of October 28, 2003, the Registrant had issued 4,403,803 shares of the Registrant's Common Stock. In addition, it had also repurchased 955,478 shares, which were being held as treasury stock and 66,307 shares, which were being held as unallocated ESOP shares. COVEST BANCSHARES, INC. Table of Contents PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO. Item 1. Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Quantitative and Qualitative Disclosure About Market Risk 28 Item 4. Controls and Procedures 31 PART II. OTHER INFORMATION Item 1. Legal Proceedings 32 Item 2. Changes in Securities 32 Item 3. Defaults upon Senior Securities 32 Item 4. Submission of Matters to a Vote of Security Holders 32 Item 5. Other Information 32 Item 6. Exhibits and Reports 33 Form 10-Q Signatures 34 Certification by Executive Officers 35 PART 1. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited) COVEST BANCSHARES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) (Dollars in thousands, except per share data) SEPT 30, 2003 DEC 31, 2002 ASSETS ------------- ------------ ------------ CASH ON HAND AND IN BANKS $ 11,557 $ 7,562 INTEREST BEARING DEPOSITS 51 17 -------- -------- CASH AND CASH EQUIVALENTS 11,608 7,579 SECURITIES: Securities Available-for-Sale 32,419 41,489 Federal Home Loan Bank and Federal Reserve Bank Stock 8,120 7,681 -------- -------- TOTAL SECURITIES 40,539 49,170 LOANS RECEIVABLE: Commercial Loans 53,750 56,799 Multi-Family Loans 283,900 252,766 Commercial Real Estate Loans 72,843 84,607 Construction Loans 55,045 54,404 Commercial Leases 173 522 Mortgage Loans 49,676 54,037 Consumer Loans 31,243 37,902 Mortgage Loans Held for Sale 712 1,026 -------- -------- TOTAL LOANS RECEIVABLE 547,342 542,063 Allowance for Loan Losses ( 7,118) ( 7,039) -------- -------- LOANS RECEIVABLE, NET 540,224 535,024 ACCRUED INTEREST RECEIVABLE 2,239 2,639 PREMISES AND EQUIPMENT 8,224 8,824 OTHER REAL ESTATE OWNED 2,200 661 GOODWILL 958 1,084 MORTGAGE SERVICING RIGHTS 66 128 OTHER ASSETS 3,079 3,812 -------- -------- TOTAL ASSETS $609,137 $608,921 ======== ======== See accompanying notes to unaudited consolidated financial statements COVEST BANCSHARES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued) (Unaudited) (Dollars in thousands, except per share data) SEPT 30, 2003 DEC 31, 2002 ------------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ LIABILITIES: Deposits: Non-Interest Bearing $ 36,609 $ 33,700 Interest Bearing Checking 41,254 34,836 Savings Accounts 121,864 94,885 Money Market Accounts 67,376 85,372 Certificates of Deposit 131,846 155,988 Jumbo CDs 1,530 1,880 Purchased CDs 70,030 66,946 ------- ------- 470,509 473,607 Short-Term Borrowings and Securities Sold U/A to Repurchase 46,087 47,370 Long-Term Advances from Federal Home Loan Bank 33,000 27,000 Advances from Borrowers for Taxes and Insurance 3,232 5,587 Accrued Expenses and Other Liabilities 4,810 6,771 ------- ------- TOTAL LIABILITIES 557,638 560,335 STOCKHOLDERS' EQUITY: Common Stock, par value $.01 per share; 7,500,000 authorized shares; 4,403,803 shares issued at 9/30/03 and 12/31/02 respectively 44 44 Additional Paid-in Capital 19,174 18,831 Retained Earnings 50,913 46,838 Treasury Stock, 955,478 shares and 923,422 shares, held at cost at 9/30/03 and 12/31/02, respectively (18,061) (16,603) Unearned ESOP shares (944) (1,202) Accumulated Other Comprehensive Income 373 678 -------- -------- TOTAL STOCKHOLDERS' EQUITY 51,499 48,586 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $609,137 $608,921 ======== ======== See accompanying notes to unaudited consolidated financial statements

COVEST BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) NINE MONTHS ENDED SEPT 30, SEPT 30, 2003 2002 OPERATING ACTVITIES -------- --------- Net Income $ 4,907 $ 5,001 Adjustments to Reconcile Net Income to Net Cash from Operating Activities Depreciation and Amortization of Premises and Equipment 637 681 Amortization of Intangibles 188 - ESOP Compensation Expense 328 50 Provision for Loan Losses 676 853 Net Gain on Sales of Securities/Loans (50) (113) Net Loss on Sales of Other Real Estate Owned 27 - Federal Home Loan Bank Stock Dividend (351) (272) Change In: Prepaid Expenses and Other Assets 733 (717) Accrued Interest Receivable 400 242 Accrued Expenses and Other Liabilities (1,475) 1,748 --------- --------- NET CASH FROM OPERATING ACTIVITIES 6,020 7,473 CASH FLOWS FROM INVESTING ACTIVITIES Loan Originations, Net of Principal Payments (8,076) (22,173) Proceeds from Sale of Loans - 20,083 Principal Payments on Mortgage-Backed and Related Securities - 1,306 Purchases of Securities (29,241) (35,842) Proceeds from Sales and Maturities of Securities 37,665 26,112 Proceeds from the Sale of Other Real Estate Owned 634 - Purchase of Office Properties and Equipment (37) (250) --------- --------- NET CASH FROM INVESTING ACTIVITIES 945 (10,764) CASH FLOWS FROM FINANCING ACTIVITIES Net Increase/(Decrease) in Deposits (3,098) 6,940 Borrowings 6,000 1,463 Repayment of Borrowings (1,283) - Net Increase/(Decrease) in Mortgage Escrow Funds (2,355) 3,050 Purchase of Common Stock Net of Proceeds from Exercise of Stock Options (1,368) (2,590) Dividend Paid (832) (841) --------- --------- NET CASH FROM FINANCING ACTIVITIES (2,936) 8,022 --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 4,029 4,731 CASH AND CASH EQUIVALENTS, BEGINNING 7,579 6,573 --------- --------- CASH AND CASH EQUIVALENTS, ENDING $11,608 $11,304 ========= ========= See accompanying notes to unaudited consolidated financial statements

See accompanying notes to unaudited consolidated financial statements COVEST BANCSHARES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(1) Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The results of operations and other data for the three-month and nine-month periods ended September 30, 2003 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2003. In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial information of CoVest Bancshares, Inc. (the "Company"), including its wholly owned subsidiary, CoVest Banc (the "Bank"). Certain amounts in prior consolidated financial statements have been reclassified to conform to the September 30, 2003 presentation. (2) Nature of Operations The Company is a bank holding company organized under the laws of the state of Delaware. It provides a full line of financial services to customers within six counties in northeast Illinois from its three branch locations. A reconciliation of the numerators and denominators for earnings per common share for the three month periods ended September 30, 2003 and 2002 are presented below: (dollars and shares in thousands) Three Months Ended September 30, ------------------------------- 2003 2002 ---- ---- Earnings per share: Net Income $1,770 $1,708 ====== ====== Weighted average common shares outstanding 3,384 3,407 ===== ===== Basic earnings per share $0.52 $0.50 ===== ===== Earnings per share assuming dilution: Net Income $1,770 $1,708 ====== ====== Weighted average common shares outstanding 3,384 3,407 Add: dilutive effect of assumed exercise of stock options 182 154 ----- ----- Weighted average common and dilutive potential common shares outstanding 3,566 3,561 ===== ===== Diluted earnings per share $0.50 $0.48 ===== ===== A reconciliation of the numerators and denominators for earnings per common share for the nine month periods ended September 30, 2003 and 2002 are presented below: (dollars and shares in thousands) Nine Months Ended September 30, ------------------------------ 2003 2002 ---- ---- Earnings per share: Net Income $4,907 $5,001 ====== ====== Weighted average common shares outstanding 3,389 3,429 ===== ===== Basic earnings per share $1.45 $1.46 ===== ===== Earnings per share assuming dilution: Net Income $4,907 $5,001 ====== ====== Weighted average common shares outstanding 3,389 3,429 Add: dilutive effect of assumed exercise of stock options 190 161 ----- ----- Weighted average common and dilutive potential common shares outstanding 3,579 3,590 ===== ===== Diluted earnings per share $1.37 $1.39 ===== ===== For the three months and nine months ended September 30, 2003 and 2002 respectively, no options to purchase shares were excluded in the computation of diluted earnings per share because all of the options' exercise prices were lower than the average market price of the common stock. (3) Stock Compensation Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation. Three Months Ended Nine Months Ended 2003 2002 2003 2002 ---- ---- ---- ---- Net income as reported $1,770 $1,708 $4,907 $5,001 Deduct: Stock-based compensation expense determined under fair value based method 18 23 66 175 ------ ------ ------ ------ Pro forma net income $1,752 $1,685 $4,841 $4,826 ====== ====== ====== ====== Basic earnings per share as reported $ 0.52 $ 0.50 $ 1.45 $ 1.46 Pro forma basic earnings per share 0.52 0.49 1.43 1.41 Diluted earnings per share as reported $ 0.50 $ 0.48 $ 1.37 $ 1.39 Pro forma diluted earnings per share 0.49 0.47 1.35 1.34 (4) Stock Repurchase Program The following table summarizes the Company's stock repurchase programs. Average Date Date # of Shares Price per Program# Announced Completed Repurchased Share -------- --------- --------- ----------- --------- 26th 3/7/03 - 43,946 $26.74 The Company announced its 26th stock repurchase program on March 7, 2003, enabling the Company to repurchase 100,000 shares of its outstanding common stock. In the ordinary course of business, the Company repurchased 30,421 shares in the third quarter of 2003 at an average price of $26.18 related to employee benefit plans. (5) Cash Dividend The regular quarterly dividend for the third quarter of 2003 was paid at $.08 per share. The same quarterly dividend was paid for the third quarter of 2002. (6) Regulatory Capital Requirements Pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), as implemented by regulations promulgated by the Office of the Comptroller of the Currency (the "OCC"), national banks must meet three separate minimum capital requirements. The following table summarizes, as of September 30, 2003, the Company's and Bank's capital requirements under FIRREA and their actual capital ratios. As of September 30, 2003, the Company and the Bank exceeded all current minimum and well capitalized regulatory capital requirements. To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purpose Action Provisions SEPT 30, 2003 Amount Ratio Amount Ratio Amount Ratio ============== ------ ------ ------ ------ ------ ----- (Dollars in Thousands) Total Capital (to Risk Weighted Assets) Company $55.5 13.3% $33.4 8.0% $41.7 10.0% Bank 52.5 12.6 33.3 8.0 41.6 10.0 Tier I Capital (to Risk Weighted Assets) Company $50.1 12.0% $16.7 4.0% $25.0 6.0% Bank 47.3 11.3 16.7 4.0 25.0 6.0 Tier I Capital (to Average Assets) Company $50.1 8.3% $24.2 4.0% $30.3 5.0% Bank 47.3 7.8 24.1 4.0 30.1 5.0 Risk Weighted Assets (Company) $416,960 Average Assets (Company) 605,584 Risk Weighted Assets (Bank) 416,487 Average Assets (Bank) 602,121 To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purpose Action Provisions SEPT 30, 2002 Amount Ratio Amount Ratio Amount Ratio ============== ------ ------ ------ ------ ------ ----- (Dollars in Thousands) Total Capital (to Risk Weighted Assets) Company $50.8 12.2% $33.4 8.0% $41.8 10.0% Bank 49.8 11.9 33.4 8.0 41.7 10.0 Tier I Capital (to Risk Weighted Assets) Company $45.5 10.9% $16.7 4.0% $25.1 6.0% Bank 44.5 10.7 16.7 4.0 25.0 6.0 Tier I Capital (to Average Assets) Company $45.5 7.7% $23.7 4.0% $29.7 5.0% Bank 44.5 7.5 23.6 4.0 29.5 5.0 Risk Weighted Assets (Company) $417,586 Average Assets (Company) 593,031 Risk Weighted Assets (Bank) 417,041 Average Assets (Bank) 589,554 (7) Proposed Merger First Midwest Bancorp, Inc. and the Company jointly announced on September 11, 2003 the execution of a definitive agreement for First Midwest to acquire the Company. The merger is expected to be completed in the fourth quarter of 2003, subject to customary closing conditions, including regulatory approvals and approval by the Company's stockholders. (8) New Accounting Pronouncement The Financial Accounting Standards Board (FASB) recently issued two new accounting standards, Statement 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, and Statement 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities, both of which generally become effective in the quarter beginning July 1, 2003. Because the Company does not have these instruments or is only nominally involved in these instruments, Management determined that, upon adopting the new standards the new accounting standards will not materially affect the Company's operating results or financial condition. In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51". This Interpretation provides new guidance for the consolidation of variable interest entities (VIEs) and requires such entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risk among parties involved. The Interpretation also adds disclosure requirements for investors that are involved with unconsolidated VIEs. The consolidation requirements apply immediately to VIEs created after January 31, 2003 and are effective for the first fiscal year or interim period beginning after September 15, 2003 for VIEs acquired before February 1, 2003. The adoption of this interpretation is not expected have a significant impact on the Company's financial condition of results of operations. (9) Special Note Concerning Forward-Looking Statements This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company's management and on information currently available to management, are generally identifiable by the use of words such as "believe," "expect," "anticipate," "plan," "intend," "estimate," "may," "will," "would," "could," "should" or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, the following: * The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company's assets. * The economic impact of past and any future terrorist attacks, acts of war or threats thereof and the response of the United States to any such threats and attacks. * The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters. * The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Company's assets) and the policies of the Board of Governors of the Federal Reserve System. * The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector. * The inability of the Company to obtain new customers and to retain existing customers. * The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet. * Technological changes implemented by the Company and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers. * The ability of the Company to develop and maintain secure and reliable electronic systems. * The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner. * Consumer spending and saving habits which may change in a manner that affects the Company's business adversely. * Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected. * The costs, effects and outcomes of existing or future litigation. * Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board. * The ability of the Company to manage the risks associated with the foregoing as well as anticipated. These risks and uncertainties should be considered in evaluating forward- looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW -------- The Company's business activities currently consist of ownership of the Bank, and investments in other equity securities. The Bank's principal business consists of attracting deposits from the public and investing these deposits, together with funds generated from operations, primarily in commercial loans, multi-family loans, commercial real estate loans, and consumer loans. The Bank's deposit accounts are insured to the maximum allowable by the Federal Deposit Insurance Corporation (the "FDIC"). The Bank's results of operations are dependent primarily on net interest income, which is the difference between the interest earned on its loans and securities portfolios, and the interest paid on deposits and borrowed funds. The Bank's operating results are also affected by loan commitment and servicing fees, loan service release fees, customer service charges, fees from annuity and insurance products, and other income. Operating expenses of the Bank include employee compensation and benefits, equipment and occupancy costs, federal deposit insurance premiums and other administrative expenses. The Bank's results of operations are further affected by economic and competitive conditions, particularly changes in market interest rates. Results are also affected by monetary and fiscal policies of federal agencies, and actions of regulatory authorities. FINANCIAL CONDITION ------------------- Total assets were $609.1 million as of September 30, 2003, compared to $608.9 million at December 31, 2002. Total liabilities remained relatively constant at $557.6 million as of September 30, 2003, compared to $560.3 million at December 31, 2002. Stockholders' equity increased 6% to $51.5 million as of September 30, 2003, compared to $48.6 million at December 31, 2002. Cash and cash equivalents increased 53% to $11.6 million at September 30, 2003 from $7.6 million at December 31, 2002. The increase resulted from an increase in cash in banks to cover higher reserves and compensating balances. Securities decreased 18% to $40.5 million as of September 30, 2003 from $49.2 million at December 31, 2002. In this low rate environment, the Company has tried to limit its investment security purchases to cover collateral requirements for its borrowings and repurchase agreements. Net loans receivable increased 1% to $540.2 million as of September 30, 2003, compared to $535.0 million at December 31, 2002. The multi-family loan portfolio increased 12% to $283.9 million as of September 30, 2003, compared to $252.7 million at December 31, 2002. The Company repurchased $16.5 million of previously participated multi-family loans in April 2003. The multi-family loan portfolio is comprised of adjustable rate loans indexed to prime, the 91- day Treasury bill rate, and 1 year, 3 year and 5 year Treasury notes. The loans have floors and prepayment penalties established upon origination. The loan principal prepayments in the multi-family loan portfolio amounted to $48.2 million for the first nine months of 2003. Construction loans increased 1% to $55.0 million as of September 30, 2003, compared to $54.4 million at December 31, 2002. The increase in construction loans represented draws on previously approved commitments. The increases in multi-family loans and construction loans were offset by decreases in commercial loans by 5%, commercial real estate loans by 14%, mortgage loans by 8% and consumer loans by 18%. In the consumer loan portfolio, auto loans decreased 40% to $4.4 million as of September 30, 2003, compared to $7.3 million at December 31, 2002. Automobile manufacturers' low percentage rate loans continue to impact the new loan fundings. Total deposits decreased 1% to $470.5 million as of September 30, 2003, compared to $473.6 million at December 31, 2002. Non-interest bearing checking accounts increased 9% to $36.6 million as of September 30, 2003, compared to $33.7 million as of December 31, 2002. Interest-bearing checking accounts increased 18% to $41.2 million as of September 30, 2003, compared to $34.8 million at December 31, 2002. Savings accounts increased 28% to $121.9 million as of September 30, 2003, compared to $94.9 million at December 31, 2002. In April 2003, the Company reduced its regular savings (with no related checking account) account rate from 1.75% to 1.00% and its relationship savings (with related checking account) account rate from 2.25% to 1.50%. The relationship savings accounts totaled $95.5 million at September 30, 2003, compared to $97.7 million at March 31, 2003. The Company believes that the savings account pricing is still very competitive in its market area. Money market accounts decreased 21% to $67.3 million as of September 30, 2003, compared to $85.4 million at December 31, 2002. The Company believes that the decrease in the average weekly money market account index rate to 1.06% caused the decrease in the accounts. The floor rate for money market accounts has been 1.00% since January 30, 2003. Certificates of deposit decreased 15% to $131.8 million as of September 30, 2003, compared to $156.0 million at December 31, 2002. Purchased certificates of deposit increased 5% to $70.0 million as of September 30, 2003, compared to $66.9 million at December 31, 2002. The Company uses brokered certificates primarily to extend the length of deposit maturities. A total of $11.1 million in brokered certificates of deposit with an average rate of 1.71% was purchased in the second quarter of 2003. There were no purchases of brokered deposits in the third quarter of 2003. Total borrowings increased 6% to $79.1 million as of September 30, 2003, compared to $74.3 million at December 31, 2002. Short-term borrowings decreased 3% to $46.1 million as of September 30, 2003, compared to $47.4 million at December 31, 2002. At September 30, 2003, the Company had purchased $26.0 million of overnight borrowings. Long-term borrowings increased 22% to $33.0 million as of September 30, 2003, compared to $27.0 million at December 31, 2002. The Company entered into two FHLB fixed term advances for $3.0 million each, at a cost of 2.06% with a 3-year term, and 2.77% with a 5-year term during the second quarter of 2003. Stockholders' equity totaled $51.5 million at September 30, 2003, compared to $48.6 million at December 31, 2002. The number of shares outstanding excluding unallocated Employee Stock Ownership Plan shares was 3,382,018 and the book value per common share outstanding was $15.23, a 12% increase over $13.62 book value at December 31, 2002. On February 22, 2002, the Employee Stock Ownership Plan purchased 81,477 shares of CoVest Bancshares, Inc. common stock, held in the Company's treasury, for an aggregate purchase price of $1,500,000, or $18.41 per share. Shares issued to the ESOP are allocated to ESOP participants based on principal repayments made by the ESOP on the loan from the Company. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with contributions from the Company. $555,586 of principal plus interest has been repaid since the inception of the loan. The Company announced its 26th stock repurchase program in March 7, 2003, enabling the Company to repurchase 100,000 shares of its outstanding stock. A total of 43,946 shares were repurchased at an average price of $26.74 through October 28, 2003. At September 30, 2003, the allowance for loan losses was $7.1 million, compared to $7.0 million at December 31, 2002. The Company recognized net charge-offs of $596,000 for the nine months ended September 30, 2003. During this period, the Company recorded a $159,000 recovery on a multi-family loan which is currently in non accrual status. In June 2002, $159,000 was charged off on this loan. The loan will remain in non-accrual status pending a continuing overall improvement in the outstanding credit. The Company provided $676,000 to the allowance for loan losses for the nine months ended September 30, 2003. The ratio of the allowance for loan losses to outstanding loans at September 30, 2003 was 1.30%, the same level as at December 31, 2002. Management believes that the allowance for loan losses at September 30, 2003 was at a level adequate to absorb probable incurred losses on existing loans. However, there can be no assurance that such losses will not exceed estimated amounts. At September 30, 2003, total non-performing loans amounted to $2,591,000, or 0.48% of net loans, compared to $5,967,000, or 1.12% of net loans at December 31, 2002. The ratio of non-performing loans to total assets was 0.79% at September 30, 2003, compared to 0.98% at December 31, 2002. The $3,016,000 commercial real estate loans in non-accrual status at December 31, 2002 were to related borrowers. $617,000 of this amount was charged-off in 2003, with the remaining amount on this credit relationship being transferred to other real estate owned and other assets when title was obtained. The $1,503,000 of non-performing multi-family loans consists of $276,000 of loans to related borrowers and loans of $191,000 and $1,036,000, respectively. The $1,036,000 loan was originally for $1,426,000 and $159,000 of this loan was charged off prior to its move to non-accrual status in June 2002. In June 2003, this loan was upgraded and the $159,000 that had been charged off was reversed and booked as recovery, with an increase in the balance of the loan to $1,036,000. The Company considered these loans in the September 30, 2003 analysis for allowance for loan losses. As of September 30, 2003, loans delinquent 90 days or more and still accruing amounted to $297,000. The $1,416,000 of commercial loans and $38,000 of consumer loans delinquent 90 days or more and still accruing at December 31, 2002 have been made current. The $14,000 that was commercial lease loan delinquent 90 days or more and still accruing at December 31, 2002 was charged-off in the first quarter. The $661,000 other real estate owned at December 31, 2002 was sold in February 2003. The Company incurred $57,000 of expenses and a loss on the sale was $27,000, which was included as a reduction to other income. As indicated above, the Company transferred two non-accrual commercial real estate loans to related borrowers totaling $2,200,000 to other real estate owned in September when title was obtained. Along with other financial institutions, management shares a concern for the outlook of the economy for the remainder of 2003 and beyond. A slowdown in economic activity has severely impacted several major industries as well as the economy as a whole. Even though there are numerous indications of emerging strength, it is not certain that this strength is sustainable. In addition, consumer confidence may be negatively impacted by the decline in equity prices. These events could still adversely affect cash flows for both commercial and individual borrowers, as a result of which, the Company could experience increases in problem assets, delinquencies and losses on loans. The following table sets forth the amounts and categories of non-performing loans and assets. SEPT 30, 2003 DEC 31, 2002 ------------- ------------ (Dollars in Thousands) Non-accruing Loans: Commercial Loans $ 262 $ - Multi-family Loans - 918 Commercial Real Estate Loans 1,503 3,016 Construction Loans - - Commercial Leases - - Mortgage Loans 410 530 Consumer 119 35 ------ ------ Total 2,294 4,499 Accruing Loans Delinquent 90 days or More: Commercial Loans $ 286 $ 1,416 Multi-family Loans - - Commercial Real Estate Loans - - Construction Loans - - Commercial Leases 8 14 Mortgage Loans 3 - Consumer - 38 ------ ------ Total 297 1,468 ------ ------ Total Non-performing Loans $2,591 $5,967 Other Real Estate Owned 2,200 661 Other Repossessed Assets - - ------ ------ Total Non-performing Assets $4,791 $6,628 ====== ====== Total Non-performing Loans as a Percentage of Net Loans 0.48% 1.12% ==== ==== Total Non-performing Assets as a Percentage of Total Assets 0.79% 1.09% ==== ==== LIQUIDITY --------- The Company's primary sources of funds are deposits, principal and interest payments on loans, and funds provided by other operations. While scheduled loan repayments and maturities of short-term investments are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, competition and the restructuring occurring in the banking industry. The Company's cash flows are a result of three principal activities: operating activities, investing activities and financing activities. Net cash provided by operating activities was $6.0 million for the nine months ended September 30, 2003. Net cash provided by investing activities was $0.9 million for the nine months ended September 30, 2003. Net cash provided by financing activities was $2.9 million for the nine months ended September 30, 2003. The Company uses its liquidity to meet its ongoing commitments to fund maturing certificates of deposit and deposit withdrawals, repay borrowings, fund existing and continuing loan commitments, and pay operating expenses. At September 30, 2003, the Company has commitments to originate loans totaling $30.1 million and its customers had approved but unused lines of credit totaling $48.1 million. The Company considers its liquidity and capital resources to be adequate to meet its foreseeable short and long-term needs. The Company expects to be able to fund or refinance, on a timely basis, its material commitments and long-term liabilities. SELECTED RATIOS --------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPT 30, SEPT 30, SEPT 30, SEPT 30, 2003 2002 2003 2002 ------- ------- ------- ------- Annualized Return on Avg. Equity 13.94% 14.58% 13.16% 14.45% Annualized Return on Avg. Assets 1.17 1.15 1.08 1.12 Book Value per Share $15.23 $13.97 $15.23 $13.97 Closing Market Price per Share $27.41 $21.00 $27.41 $21.00 Earnings per Primary Share: Basic $0.52 $0.50 $1.45 $1.46 Diluted $0.50 $0.48 $1.37 $1.39 Net Interest Margin 3.59% 3.58% 3.60% 3.68% Ratio of Operating Expense to Average Total Assets, Annualized 2.32% 2.24% 2.35% 2.40% Ratio of Net Interest Income to Non-Interest Expense 1.49x 1.53x 1.47x 1.48x RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 ----------------------------------------------------------------------------- Net income for the third quarter of 2003 was $1,770,000, up 4% over $1,708,000 for the same period in 2002, and up 4% over $1,707,000 for the second quarter of 2003. Basic earnings per share were $0.52, a 4% increase, compared to $0.50 for the same period in 2002. Diluted earnings per share were $0.50, a 4% increase, compared to $0.48 for the same period in 2002. Return on average equity and return on average assets for the third quarter of 2003 were 13.94% and 1.17%, respectively, compared to 14.58% and 1.15% for the same quarter in 2002. Return on average equity and return on average assets for the second quarter of 2003 were 13.80% and 1.11%, respectively. The Company's efficiency ratio (defined as total non-interest expense divided by the sum of net interest income and total non-interest income) for the third quarter of 2003 was 54.31%, compared to 53.86% for the same period in 2002. The Company's efficiency ratio for the second quarter of 2003 was 55.89%. The goal for calendar year 2003 is to maintain an efficiency ratio at lower than 56%. Net interest income for the third quarter of 2003 increased $144,000, or a 3% increase, compared to the same period in 2002, or a 3% decrease, compared to the second quarter of 2003. Net interest margin for the third quarter of 2003 was 3.59%, compared to 3.58% for the same period in 2002 versus 3.64% for the second quarter of 2003. The net interest spread for the third quarter of 2003 was 3.28%, a 3% increase, compared to 3.18% for the third quarter of 2002, or a 2% decrease, compared to 3.35% for the second quarter of 2003. The average yield on interest earning assets for the third quarter of 2003 was 5.47%, a 77 basis point decrease, compared to 6.24% for the same period in 2002. The average cost of interest bearing liabilities for the third quarter of 2003 was 2.19%, an 87 basis point decrease, compared to 3.06% for the same period in 2002. The decrease in the cost of average interest bearing liabilities exceeded the decrease in the yield on average interest earning assets. The increase in average non-interest bearing deposits by $4.2 million, or 13%, contributed to the improved interest margin. The Company's total interest income (tax equivalent) on earning assets decreased 10% to $8,013,000 for the third quarter of 2003, compared to $8,930,000 for the same period in 2002. It was the Company's strategy since 2002 to concentrate in funding adjustable rate loans to minimize exposure to rising interest rates. The Company has been asset sensitive since February 2002. The Company's loan portfolio was comprised of 83% in adjustable/floating rate loans at September 30, 2003. The average balance of loans for the third quarter of 2003 increased 9% to $546.0 million, compared to $503.0 million for the same period in 2002. The biggest increase was in multi-family loans, which is mostly comprised of adjustable rate term loans with floors and prepayment penalties established upon origination. The Company repurchased $16.5 million of medium-term multi-family loan participations that have an average yield of 7.00%, in April 2003. Loan principal prepayments in the multi-family loan portfolio for the third quarter of 2003 totaled $13.3 million. Loan costs associated with loan prepayments, which are accounted for as reduction to interest income, amounted to $46,000 for the third quarter of 2003. The average yield on loans for the third quarter of 2003 decreased to 5.54%, a 115 basis point decrease, compared to 6.69% for the same period in 2002. The increased volume of loans partially offset the effect of income reduction from falling rates. In February 2002, the Company set a 5.00% floor on its home equity loan portfolio. The average balance of home equity and home improvement loans decreased 18% to $25.7 million for the third quarter of 2003, compared to $31.3 million for the same period in 2002. The Company's ALCO Committee at its May 2003 meeting approved the removal of the 5.00% floor, effective August 2003. The Company hopes that this change in pricing strategy will help to increase loan volume. The average balance of securities for the third quarter of 2003 decreased 43% to $39.5 million, compared to $68.9 million for the same period in 2002. The Company tries to limit its security purchases to cover collateral requirements for its borrowings and repurchase agreements. The average yield on securities for the third quarter of 2003 was 4.60%, a 14 basis point decrease, compared to 4.74% for the same period in 2002. Overnight investments averaged $2.2 million in the third quarter of 2003, a 68% decrease, compared to $6.8 million for the same period in 2002. The redeployment of funds to higher yielding loans contributed to a higher interest margin for the third quarter of 2003, compared to the same period in 2002 and the second quarter of 2003. Included in equity investments at the holding company are $1.9 million of trust preferred issues with fixed rates ranging from 6.75% to 10.00%. Total interest expense for the third quarter of 2003 decreased 28% to $2,765,000, compared to $3,815,000 for the third quarter of 2002. The average balance of interest-bearing deposits was $446.3 million for the third quarter of 2003, an 18% increase, compared to $379.1 million for the same period in 2002. Money market accounts decreased 25% to $71.9 million and certificates of deposit decreased 20% to $134.7 million, while savings accounts increased 51% to $121.4 million. Until April 1, 2003, the relationship savings (with related checking accounts) rate was 2.25% while the regular savings (with no related checking accounts) rate was 1.75%. The decline in the average weekly money market account index to 1.05% for the second quarter and the reduced rates on short-term certificates of deposit caused customers to shift their deposits to savings accounts. In April 2003, the Company reduced the relationship savings rate to 1.50% and the regular savings rate to 1.00%. The relationship savings accounts totaled $95.5 million at September 30, 2003, compared to $97.7 million at March 31, 2003. The Company believes the new savings account pricing is still competitive in its market area. Purchased certificates of deposit increased 54% to $76.4 million for the third quarter of 2003, compared to $49.7 million for the same period in 2002. The cost of purchased funds for the third quarter of 2003 was 137 basis points less than that of the same period in 2002. The total cost of deposits for the third quarter of 2003 was 2.19%, 87 basis points less than the 3.06% for the same period in 2002. The average balance of borrowings for the third quarter of 2003 decreased 15% to $59.3 million, compared to $70.1 million for the same period in 2002. The average cost of borrowings for the third quarter of 2003 was 4.00%, 27 basis points less than 4.27% for the same period in 2002. The provision for loan losses was $161,000 for the third quarter of 2003 versus $217,000 for the same period in 2002. The net charge-offs for the third quarter of 2003 were $160,000, compared to $16,000 for the same period in 2002. The ratio of net charge-offs to average loans for the third quarter of 2003 was 0.03%, compared to 0.00% for the same period in 2002. The ratio of allowance for loan losses to total outstanding loans at September 30, 2003 was 1.30%, compared to 1.32% at September 30, 2002. On a quarterly basis, management of the Company meets to review the adequacy of the allowance for loan losses. Each loan officer grades his or her individual commercial credits and the Company's outsourced loan review function validates the officers' grades. In the event that the loan review results in a downgrade of the loan, it is included in the allowance analysis at the lower grade. The grading system is in compliance with the regulatory classifications and the allowance is allocated to the loans based on the regulatory grading, except in instances where there are known differences (i.e. collateral value is nominal, etc). Once the specific portion of the allowance is calculated, management then calculates a historical portion for each loan category based on loan loss history, current economic conditions and trends in the portfolio, including delinquencies and impairments. As a result of this analysis, management believes that the allowance for losses on loans at September 30, 2003 was at a level adequate to absorb probable incurred losses on existing loans, although there can be assurance that such losses will not exceed the estimated amounts. LOAN LOSS ALLOWANCE ANALYSIS. The following table sets forth an analysis of the Company's allowance for loan losses for the periods indicated. THREE MONTHS ENDED SEPT 30, SEPT 30, 2003 2002 ------- ------- (Dollars in Thousands) Balance at Beginning of Period $7,117 $6,650 Charge-offs: Commercial Loans - - Multi-family Loans 88 - Commercial Real Estate Loans 17 - Construction Loans - - Commercial/Municipal Leases 50 - Mortgage Loans 3 - Consumer 10 40 ------ ------ Charge-offs Total 168 40 Recoveries: Commercial Loans - - Multi-family Loans - - Commercial Real Estate Loans - - Construction Loans - - Commercial/Municipal Leases - - Mortgage Loans - - Consumer 8 24 ------ ------ Recoveries Total 8 24 ------ ------ Net Charge-offs 160 16 Additions Charged to Operations 161 217 ------ ------ Balance at End of Period $7,118 $6,851 ====== ====== Ratio of Net Charge-offs During the Period to Average Loans Outstanding During the Period 0.03% 0.00% Ratio of Allowance for Loan Losses to Non-performing Loans 2.75x 1.57x Ratio of Allowance for Loan Losses to Total Outstanding Loans 1.30% 1.32% Non-interest income for the third quarter of 2003 increased $79,000, or a 7% increase, compared to the third quarter of 2002. Loan charges and servicing fees decreased $12,000. An average of 489 loans was serviced in the third quarter of 2003, compared to 872 loans in the third quarter of 2002. Prepayment fees decreased 9% to $234,000 for the third quarter of 2003, compared to $258,000 for the same period in 2002. Loan prepayments for the third quarter of 2003 totaled 22 loans for $13.3 million, compared to 25 loans for $15.8 million for the same period in 2002. Mortgage banking fees for the third quarter of 2003 increased 56% to $318,000, compared to $205,000 for the same period in 2002. Other income for the third quarter of 2003 increased 42% to $91,000, compared to $64,000 for the same period in 2002. Non-interest expense for the third quarter of 2003 increased $180,000, or a 5% increase, compared to the third quarter of 2002. Compensation and benefits increased $181,000 to $1,751,000, compared to $1,570,000. Incentive compensation on retail banking increased $6,000. Commissions increased $90,000 due to greater mortgage loan originations in the third quarter of 2003, compared to the same period in 2002. Bonus expense decreased $86,000. Payroll taxes increased $40,000. Group medical self-insurance increased $145,000, compared to 2002 due to medical insurance being accrued based on average insurance claims, compared to 2002 where accrual was based on maximum insurance claims. Post retirement expenses decreased $14,000 as the plan was frozen in 2002 and benefits will only be provided to current retirees. Education and training expenses increased $18,000. Occupancy and equipment expenses decreased $66,000 due to planned computer upgrades and the purchase of a replacement van being put on hold due to the pending merger. Data processing expenses increased $8,000. Other expenses increased $60,000. The Company incurred $61,000 of merger related expenses in the third quarter of 2003, compared to $103,000 in the second quarter of 2003. No merger related costs were incurred in the third quarter of 2002. The second quarter expenditures were related to the terminated merger proposal, while the third quarter expenditures were evenly split between the terminated merger proposal and the proposed merger with First Midwest Bancorp, Inc. Income tax expense increased $37,000 to $1,019,000 for the third quarter of 2003, compared to $982,000 for the same period in 2002. The effective tax rate was 37% for the third quarter of 2003, compared to 38% for the same period in 2002. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 --------------------------------------------------------------------------- Net income for the first nine months of 2003 decreased 2% to $4,907,000, compared to $5,001,000 for the same period in 2002. Basic earnings per share were $1.45, a 1% decrease, compared to $1.46 for the same period in 2002. Diluted earnings per share were $1.37, a 1% decrease, compared to $1.39 for the same period in 2002. Return on average equity and return on average assets for the first nine months of 2003 were 13.16% and 1.08%, respectively, compared to 14.45% and 1.12% for the same period in 2002. The Company's efficiency ratio for the first nine months of 2003 was 55.70%, compared to 55.06% for the same period in 2002. The Company's goal for 2003 is to maintain an efficiency ratio at lower than 56%. Net interest income for the first nine months of 2003 decreased $42,000 to $15,788,000, compared to $15,830,000 for the same period in 2002. Interest income for the first nine months of 2003 decreased 11% while interest expense decreased 25%, compared to the same period in 2002. The average yield on interest earning assets for the first nine months of 2003 was 5.62%, a 79 basis point decrease, compared to 6.41% for the same period in 2002. The average cost of interest bearing liabilities was 2.33%, a 78 basis point decrease, compared to 3.11% for the same period in 2002. The net interest spread for the first nine months of 2003 was 3.29%, compared to 3.30% for the same period in 2002. The net interest margin for the first nine months of 2003 was 3.60%, compared to 3.68% for the same period in 2002. The increase in the average balance of non-interest bearing deposits by $4.0 million partially offset the effect of the contraction in the net interest rate spread. The Company's total interest income (tax equivalent) on earnings assets was $15,851,000 for the first nine months of 2003, compared to $15,924,000 for the same period in 2002. The average balance of interest earning assets increased 2% for the first nine months of 2003. The average balance of loans for the first nine months of 2003 increased 6% to $542.8 million, compared to $510.4 million for the same period in 2002. The average yield on loans was 5.72%, a 91 basis point decrease, compared to 6.63% for the same period in 2002. Multi-family loans make up 49% of the Company's loan portfolio and increased 17% to $264.5 million, compared to $226.9 million for the same period in 2002. The multi-family loan portfolio is comprised of adjustable rate loans with floors and prepayment penalties established upon origination. In April 2003, the Company repurchased $16.5 million of medium-term multi-family loan participations that have an average yield of 7.00%. Loan principal prepayments in the multi-family loan portfolio for the first nine months of 2003 totaled 76 loans for a total loan balance of $48.2 million. Loan costs associated with loan prepayments that are accounted for as reduction to interest income amounted to $151,000 for the first nine months of 2003. The increased volume of loans partially offset the effect of interest income reduction from falling rates. The average balance of securities decreased $21.5 million to $45.0 million for the first nine months of 2003. The Company tries to limit its security purchases to cover collateral requirements for its borrowings and repurchase agreements. The average balance of overnight investments for the first nine months of 2003 decreased $5.1 million, compared to the same period in 2002 and the first quarter of 2003. The Company redeployed these funds to higher yielding loans. Included in equity investments at the holding company are $1.9 million of trust preferred issues with fixed rates ranging from 6.75% to 10.00%. Total interest expense for the first nine months of 2003 decreased 25% to $8,908,000, compared to $11,813,000. The average balance of interest bearing liabilities for the first nine months of 2003 was $511.9 million, compared to $510.4 million for the same period in 2002. The average balance of interest bearing liabilities increased 1% to $509.7 million, compared to $506.5 million for the same period in 2002. Money market accounts decreased 26% and certificates of deposit decreased 17%. Savings accounts increased 66% and purchased certificates of deposit increased 35%. Until April 2003, the relationship savings (with related checking accounts) rate was 2.25% while regular savings (with no related checking accounts) rate was 1.75%. The money market index rate declined to an average of 1.11% for the first nine months in 2003. The Company believes that a number of money market customers and short- term certificate of deposit account holders shifted their deposits to savings accounts during the period. In April 2003, the Company reduced the relationship savings rate to 1.50% and the regular savings rate to 1.00%. The Company believes that this savings account pricing is still competitive in its market area. The average cost of interest bearing deposits decreased 27% to 2.14%, an 80 basis point decrease, compared to 2.94% for the same period in 2002. The average cost of purchased certificates of deposit decreased to 2.63%, a 114 basis point decrease, compared to 3.77% for the same period in 2002. The average balance of borrowings for the first nine months of 2003 decreased 14% to $65.8 million, compared to $76.1 million for the same period in 2002. The average cost of borrowings decreased 12% to 3.64%, a 42 basis point decrease, compared to 4.06% for the same period in 2002. The provision for loan losses was $676,000 for the first nine months of 2003, compared to $853,000 for the same period in 2002. The net charge-offs for the first nine months of 2003 were $597,000, compared to $549,000 for the same period in 2002. Management believes that the allowance for loan losses at September 30, 2003, was at a level adequate to absorb probable incurred losses on existing loans. However, there can be no assurance that such losses will not exceed estimated amounts. On a quarterly basis, management of the Company meets to review the adequacy of the Allowance for Loan Losses. Each loan officer grades his or her individual commercial credits and the Company's outsourced loan review function validates the officers' grades. In the event that loan review results in a downgrade of the loan, it is included in the allowance analysis at the lower grade. The grading system is in compliance with the regulatory classifications and the allowance is allocated to the loans based on the regulatory grading, except in instances where there are known differences (i.e. collateral value is nominal, etc.) Once the specific portion of allowance is calculated, management then calculates a historical portion for each loan category based on loan loss history, current economic conditions and trends in the portfolio, including delinquencies and impairments. As a result of this analysis, management believes that the allowance for estimated losses on loans at September 30, 2003 was at a level adequate to absorb probable incurred losses on existing loans, although there can be no assurance that such losses will not exceed the estimated amounts. LOAN LOSS ALLOWANCE ANALYSIS. The following table sets forth an analysis of the Company's allowance for possible loan losses for the periods indicated. NINE MONTHS ENDED SEPT 30, SEPT 30, 2003 2002 ------- ------- (Dollars in Thousands) Balance at Beginning of Period $7,039 $6,547 Charge-offs: Commercial Loans - - Multi-family Loans 88 159 Commercial Real Estate Loans 617 240 Construction Loans - - Commercial/Municipal Leases 64 20 Mortgage Loans 3 49 Consumer 21 126 ------ ------ Charge-offs Total 793 594 Recoveries: Commercial Loans - - Multi-family Loans 159 - Commercial Real Estate Loans - - Construction Loans - - Commercial/Municipal Leases - 10 Mortgage Loans - - Consumer 37 35 ------ ------ Recoveries Total 196 45 ------ ------ Net Charge-offs 597 549 Additions Charged to Operations 676 853 ------ ------ Balance at End of Period $7,118 $6,851 ====== ====== Ratio of Net Charge-offs During the Period to Average Loans Outstanding During the Period 0.11% 0.11% Ratio of Allowance for Possible Loan Losses to Non-performing Loans 2.75x 1.57x Non-interest income decreased $204,000, or 6%, for the first nine months of 2003, compared to the same period in 2002. Loan prepayment fees decreased $396,000. Loan prepayments for the first nine months of 2003 totaled 76 loans amounting to $48.2 million, compared to 96 loans amounting to $77.5 million for the same period in 2002. Loan charges and servicing fees decreased $59,000. An average of 585 loans was serviced during the first nine month of 2003, compared to 948 for the same period in 2002. Mortgage banking fees increased $305,000. Other income decreased $66,000. Included in other income for 2002 were $65,000 representing interest on 1992 and 1993 State of Illinois income tax refunds and a $2,000 loss on sale of OREO. Included in other income for 2003 were $3,000 representing interest on 1999 and 2000 State of Illinois income tax refunds and a $21,000 loss on sale of OREO. Non-interest expense decreased $13,000 for the first nine months of 2003, compared to the same period in 2002. Compensation and benefits increased $227,000. Salary, overtime and temporary help expenses increased $63,000. Group medical self-insurance decreased $35,000 because the accrual for 2003 is based on estimated average claims, while the accrual for 2002 was based on estimated maximum claims. Taxes and benefits increased $129,000. ESOP expense increased $258,000. An additional payment was made to the ESOP plan when it was thought that the proposed acquisition of the Company by Midwest Banc Holdings (which was terminated on June 30, 2003) would be consummated. Included in ESOP expense was $70,000 of stock price appreciation on the released ESOP shares. Post retirement expenses decreased $38,000, as the plan was frozen in 2002 and benefits will only be provided to current retirees. Education and training expenses decreased $34,000. Occupancy and equipment expenses decreased $100,000 due to planned computer upgrades being placed on hold due to the pending merger agreement. Legal expenses decreased $13,000 and consulting fees decreased $6,000. Loan related expenses decreased $455,000 while deposit related expenses increased $60,000. General and administrative expenses decreased $42,000. REO expenses decreased $254,000. Other expenses decreased $66,000. The Company incurred $266,000 of merger related expenses in the first nine months of 2003 relating to the terminated merger proposal, as with as to the proposed merger with First Midwest Bancorp, Inc. There were no merger related expenses in the same period in 2002. The agreement with Midwest Banc Holdings was terminated on June 30, 2003. Income tax expense for the first nine months of 2003 was $2,931,000 relatively the same level, compared to the same period in 2002. The effective tax rate was 38% for the first nine months of 2003, compared to 37% for the same period in 2002. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK In an attempt to manage the Company's exposure to changes in interest rates, management closely monitors the Company's interest rate risk. Interest rate risk results when the maturity or repricing intervals and interest rate indices of the interest-earning assets, interest-bearing liabilities, and off-balance sheet financial instruments are different, creating a risk that changes in the level of market interest rates will result in disproportionate changes in the value of, and the net earnings generated from, the Company's interest-earning assets, interest-bearing liabilities, and off-balance sheet financial instruments. The Company's exposure to interest rate risk is managed primarily through the Company's strategy of selecting the types and terms of interest-earning assets and interest-bearing liabilities which generate favorable earnings, while limiting the potential negative effects of changes in market interest rates. Since the Company's primary source of interest-bearing liabilities is customer deposits, the Company's ability to manage the types and terms of such deposits may be somewhat limited by customer preferences in the market areas in which the Company operates. Borrowings, which include FHLB advances, short-term borrowings, and long-term borrowings, are generally structured with specific terms which in management's judgment, when aggregated with the terms for outstanding deposits and matched with interest- earning assets, mitigate the Company's exposure to interest rate risk. The rates, terms and interest rate indices of the Company's interest-earning assets result primarily from the Company's strategy of investing in loans and securities (a substantial portion of which have adjustable-rate terms) which permit the Company to limit its exposure to interest rate risk, together with credit risk, while at the same time achieving a positive interest rate spread from the difference between the income earned on interest-earning assets and the cost of interest-bearing liabilities. The Company has been setting floors on its non-retail adjustable rate loans as a protection in a falling rate environment since the introduction of that type of product to its loan mix. On October 9, 2001, the Company entered into an Interest Rate Cap Agreement with Morgan Keegan for a notional amount of $10 million for three years, against the 91 day Treasury Bill rate, at the strike rate of 4.50%. The Company paid a fixed amount of $113,000 covering the entire 3-year agreement. A weekly weighted average calculation 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. In addition to periodic gap reports comparing the sensitivity of interest- earning assets and interest-bearing liabilities to changes in interest rates, management utilizes a monthly report ("model") prepared by the Bank which measures the Bank's exposure to interest rate risk. The model calculates the present value of assets, liabilities, off-balance sheet financial instruments, and equity at current interest rates, and at hypothetical higher and lower interest rates at one percent intervals. The present value of each major category of financial instrument is calculated by the model using estimated cash flows based on weighted average contractual rates and terms at discount rates representing the estimated current market interest rate for similar financial instruments. The resulting present value of longer term fixed-rate financial instruments are more sensitive to change in a higher or lower market interest rate scenario, while adjustable-rate financial instruments largely reflect only a change in present value representing the difference between the contractual and discounted rates until the next interest rate repricing date. The following table presents the Company's exposure for the next twelve months, to hypothetical changes in interest rates at the dates indicated. SEPT 30, 2003 Change in Percent Change in Interest Rates Percent Change in MV of Portfolio (basis points) Net Interest Income Equity ---------------- --------------------- ------------------- +200 +4% -12% +100 +2 -6 0 0 0 -100 -1 +3 SEPT 30, 2002 Change in Percent Change in Interest Rates Percent Change in MV of Portfolio (basis points) Net Interest Income Equity ---------------- --------------------- ------------------- +200 +9% -4% +100 +4 -2 0 0 0 -100 -3 +2 Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable- rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the loan. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the tables. Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase. In addition, the previous table does not necessarily indicate the impact of general interest rate movements on the Company's net interest income because the repricing of certain categories of assets and liabilities are subject to competitive and other pressures beyond the Company's control. As a result, certain assets and liabilities indicated as maturing or otherwise repricing within a stated period may in fact mature or reprice at different times and at different volumes. ITEM 4. CONTROLS AND PROCEDURES An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2003. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls. PART II - OTHER INFORMATION COVEST BANCSHARES, INC. ITEM 1. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS (a) Exhibits 10.27 Amendment to CoVest Bancshares, Inc. Employment Agreement between CoVest Bancshares, Inc., CoVest Banc, National Association and James L. Roberts, dated July 28, 2003. 10.28 Amendment to CoVest Bancshares, Inc. Employment Agreement between CoVest Bancshares, Inc., CoVest Banc, National Association and Paul A. Larsen, dated July 28, 2003. 10.29 Amendment to CoVest Bancshares, Inc. Employment Agreement between CoVest Bancshares, Inc., CoVest Banc, National Association and J. Stuart Boldry, Jr., dated July 28, 2003. 10.30 Change of Control and Non-Compete Agreement between CoVest Bancshares, Inc., and Michael A. Sykes, dated July 28, 2003. 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/ 15d-14(a) 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/ 15d-14(a) 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K A report on Form 8-K was filed on July 1, 2003 to report under Item 5 the termination of the merger agreement between the Company and Midwest Banc Holdings, Inc. A report on Form 8-K was filed on July 29, 2003 to report under Item 5 the Company's earnings for the third quarter of 2003. A report on Form 8-K was filed on September 2, 2003 to report under Item 5 the declaration of a regular quarterly dividend. A report on Form 8-K was filed on September 11, 2003 to report under Item 5 the execution of a definitive agreement for First Midwest Bancorp, Inc. to acquire the Company. A report on Form 8-K/A was filed on September 17, 2003, amending the Form 8-K filed on September 11, 2003, to file a copy of the definitive agreement for First Midwest Bancorp, Inc. to acquire the Company. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COVEST BANCSHARES, INC. DATED: OCTOBER 28, 2003 BY: /s/ JAMES L. ROBERTS JAMES L. ROBERTS PRESIDENT AND CHIEF EXECUTIVE OFFICER BY: /s/ PAUL A. LARSEN PAUL A. LARSEN EXECUTIVE VICE PRESIDENT, TREASURER AND CHIEF FINANCIAL OFFICER Exhibit 31.1 I, James L. Roberts, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CoVest Bancshares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [intentionally omitted] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 28, 2003 /S/ JAMES L. ROBERTS JAMES L. ROBERTS CHIEF EXECUTIVE OFFICER Exhibit 31.2 I, Paul A. Larsen, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CoVest Bancshares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [intentionally omitted] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 28, 2003 /S/ PAUL A. LARSEN PAUL A. LARSEN CHIEF FINANCIAL OFFICER Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of CoVest Bancshares, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James L. Roberts, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. DATE: OCTOBER 28, 2003 /S/ JAMES L. ROBERTS JAMES L. ROBERTS CHIEF EXECUTIVE OFFICER Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of CoVest Bancshares, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Paul A. Larsen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. DATE: OCTOBER 28, 2003 /S/ PAUL A. LARSEN PAUL A. LARSEN CHIEF FINANCIAL OFFICER

COVEST BANCSHARES INC 10-Q