-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hp1SIlxv3FnOaMvP9Ijru9T+McA6D0HJX4iAS1WvhACuHXlNjPI4HVSgI9ty7yqx OnUmWjEuqi7Ea3B2QnAigQ== 0000950131-00-002198.txt : 20000331 0000950131-00-002198.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950131-00-002198 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST OAK BROOK BANCSHARES INC CENTRAL INDEX KEY: 0000717837 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 363220778 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14468 FILM NUMBER: 585242 BUSINESS ADDRESS: STREET 1: 1400 16TH ST CITY: OAK BROOK STATE: IL ZIP: 60523 BUSINESS PHONE: 6305711050 MAIL ADDRESS: STREET 1: 1400 16TH ST CITY: OAK BROOK STATE: IL ZIP: 60523 FORMER COMPANY: FORMER CONFORMED NAME: FIRST OAK BANCSHARES DATE OF NAME CHANGE: 19970407 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 Commission file number 0-14468 ---------------- FIRST OAK BROOK BANCSHARES, INC. DELAWARE 36-3220778 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1400 Sixteenth Street, Oak Brook, IL 60523 - Telephone Number (630) 571-1050 Securities registered pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $2.00 par value Preferred Share Purchase Rights ---------------- 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 and 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S)229.405 of this chapter) 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. As of March 17, 2000, 6,445,782 shares of Common Stock were outstanding and the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately: $65,966,452 based upon the last sales price of the registrant's Common Stock at $15.25 per share as reported by the National Association of Securities Dealers Automated Quotation System. Documents incorporated by reference: Portions of the Company's Proxy Statement for its 2000 Annual Meeting of Shareholders to be filed on or about April 1, 2000 are incorporated by reference. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Form 10-K Table of Contents Certain information required to be included in Form 10-K is included in the Proxy Statement used in connection with the 2000 Annual Meeting of Shareholders to be held on May 2, 2000.
Page Number ------ PART I Item 1 Business and Statistical Disclosure by Bank Holding 2 Companies................................................... Item 2 Properties.................................................. 6 Item 3 Legal Proceedings........................................... 6 Item 4 Submission of Matters to a Vote of Security Holders......... 6 PART II Item 5 Market for Registrant's Common Equity and Related 7 Stockholder Matters......................................... Item 6 Selected Financial Data..................................... 8 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operation.................................... 10 Item 7A Quantitative and Qualitative Disclosures about Market 29 Risks....................................................... Item 8 Financial Statements and Supplementary Data................. 30 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 50 PART III Item 10 Directors and Executive Officers of the Registrant.......... 51 Item 11 Executive Compensation...................................... 51 Item 12 Security Ownership of Certain Beneficial Owners and 51 Management.................................................. Item 13 Certain Relationships and Related Transactions.............. 51 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 52 8-K......................................................... Signatures............................................................ 55
1 PART I ITEM 1. Business and Statistical Disclosure by Bank Holding Companies General First Oak Brook Bancshares, Inc. (the Company) was organized under Delaware law on March 3, 1983, as a bank holding company under the Bank Holding Company Act of 1956, as amended. The Company owns all of the outstanding capital stock of Oak Brook Bank (the Bank), Oak Brook, Illinois, which is an Illinois state- chartered bank. The Company is headquartered and its largest banking office is located in Oak Brook, Illinois twenty miles west of downtown Chicago. The Bank has nine locations in DuPage County and three locations in Cook County. Another branch is scheduled to open in Chicago, Illinois on Huron and Dearborn Streets in the third quarter of 2000. The Company employs 302 full-time equivalent employees at December 31, 1999. Prior to May 4, 1999, the Company had two classes of common stock, Class A common stock and Common stock. The Class A common stock was entitled to one- twentieth of one vote and a cash dividend of at least 120% of the dividend declared on the Common stock. The Common stock was convertible into Class A common at any time on a one-for-one basis. The Company had authorized shares of Class A common and Common stock of 10,000,000 and 6,000,000, respectively at December 31, 1998. On May 4, 1999, the Shareholders of the Company approved the reclassification of the Common stock into Class A common stock on a one-for- one basis, having one vote per share. As a result of the reclassification, the Class A common stock is now the only class of outstanding common stock of the Company and has been renamed "Common Stock". The Company has 16,000,000 authorized shares of Common Stock at December 31, 1999. On May 4, 1999, the Company's Board of Directors adopted a shareholder rights plan by providing for a dividend distribution of one preferred share purchase right for each share of the Company's Common Stock held of record on May 21, 1999. As of December 31, 1999, the Company had total assets of $1,146,356,000; loans of $719,969,000 deposits of $894,072,000, and shareholders' equity of $79,999,000. The business of the Company consists primarily of the ownership, supervision and control of its subsidiary bank. The Company provides its subsidiary bank with advice, counsel and specialized services in various fields of banking policy and strategic planning. The Company also engages in negotiations designed to lead to the acquisition of other banks and closely related businesses. The Bank is engaged in the general retail and commercial banking business. The services offered include demand, savings, and time deposits, corporate cash management services, and commercial and personal lending products. In addition, related products and services are offered including merchant card processing, foreign currency sales, safe deposit box operations and other banking services custom tailored for commercial, industrial and governmental customers. The Bank has a full service investment management and trust department. In addition, the Bank established an Internet Branch located at www.obb.com in November 1999 which provides its customers with another way to access many of the products and services offered by the Bank. The Bank originates the following types of loans: commercial, real estate (land acquisition and construction, commercial mortgages, residential mortgages and home equity lines), indirect auto and consumer loans. The extension of credit inherently involves certain levels and types of risk (general economic conditions, industry and concentration risk, interest rate risk, and credit and default risk) which the Company manages through the establishment of lending, credit and asset/liability management policies and procedures. Loans originated comply with the Bank's loan policies and governmental rules, regulations and laws. While the Bank's loan policy varies for different loan products, the policy generally covers such items as: percentages to be advanced against collateral, blanket or specific liens, insurance requirements, maximum terms, down payment requirements, debt-to-income ratio, credit history and other matters of credit concern. 2 The Bank's loan policy grants limited loan approval authority to designated loan officers. Where a credit request exceeds the loan officer's approval authority, approval by a senior lending officer and/or bank loan committee is required. The loan policy also sets forth those credit requests that, either because of the amount and/or type, require the approval of the bank loan committee. Lending involves credit risk. Credit risk is controlled and monitored through active asset quality management and the use of lending standards, thorough review of potential borrowers, and active asset quality administration. Active asset quality administration, including early problem loan identification and timely resolution of problems, further ensures appropriate management of credit risk and minimization of loan losses. The allowance for possible loan losses ("ALL") represents management's estimate of an amount adequate to provide for potential losses inherent in the loan portfolio. Management's evaluation of the adequacy of the ALL is based on management's ongoing review of the loan portfolio, consideration of past loan loss experience, trends in past due and nonperforming loans, risk characteristics of the various classifications of loans, current economic conditions, the fair value of underlying collateral, and other factors which could affect potential credit losses. Credit risk management is discussed in Item 7 under "Allowance and Provision for Loan Losses" and "Nonperforming Assets" and in Item 8 under Notes 1 and 4 to the consolidated financial statements. In January 2000, the Bank, received approval from the FDIC and the Illinois Office of Banks and Real Estate to establish a corporation, Oak Real Estate Development Corporation, as a wholly owned subsidiary of the Bank which will acquire, develop, rehabilitate and sell or rent single/multi family residential real estate, residential apartment buildings and commercial properties that are part of or ancillary to residential real estate. Approval has been granted for this corporation to transact such business and deal with real estate within the State of Illinois. Oak Real Estate Development Corporation will have a board of directors and officers consisting of individuals who are currently directors and officers of the Company and the Bank. Competition The Company and its subsidiary bank operate primarily in DuPage County, Illinois, with nine locations, and three locations in Cook County, Illinois, two of which are located in western Cook County and the other on Chicago's North Shore. At June 30, 1999, the Company's nine DuPage County, Illinois, offices held $745.9 million in deposits for an approximate 6.2% market share in relation to the total deposits in DuPage County commercial banks. The Company's two offices in Cook County, Illinois, (LaGrange was not opened until September 1999) contained $96.9 million in deposits for an approximate .1% market share of Cook County. The Company's offices are part of the Chicago banking market, as defined by the Federal Reserve Bank of Chicago, consisting of Cook, DuPage and Lake Counties, which at June 30, 1999, had $117.5 billion in deposits. The Bank is located in a highly competitive market facing competition for deposits, loans and other financial services from many financial intermediaries, including banks, savings and loan associations, finance companies, credit unions, mortgage companies, retailers, stockbrokers, insurance companies, mutual funds and investment companies, many of which have greater assets and resources than the Company. The Bank's market area is experiencing increased competition from the acquisition of local financial institutions by large out-of-state banking institutions. Regulation and Supervision General The Company is a bank holding company subject to the restrictions and regulations adopted under the Bank Holding Company Act of 1956, as amended (the BHCA), and interpreted by the Board of Governors of the Federal Reserve System (the Federal Reserve Board), and the Company is also subject to federal securities laws 3 and Delaware Law. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve Board before acquiring direct or indirect ownership or control of 5% or more of the voting shares of any bank or bank holding company. However, no acquisition may be approved if it is prohibited by applicable state law. The Company is examined by the Federal Reserve Bank of Chicago. The Bank is subject to extensive governmental regulation and periodic regulatory reporting requirements. The regulations by various governmental entities, as well as federal and state laws of general application affect the Company and the subsidiary bank in many ways including but not limited to: requirements to maintain reserves against deposits, payment of Federal Deposit Insurance Corporation insurance, restrictions on investments, establishment of lending limits and payment of dividends. The Bank is primarily supervised and examined by the Illinois Office of Banks and Real Estate and the Federal Deposit Insurance Corporation (FDIC). The Federal Reserve Bank examines and supervises bank holding companies pursuant to risk-based capital adequacy guidelines. These guidelines establish a uniform capital framework that is sensitive to risk factors, including off- balance sheet exposures, for all federally supervised banking organizations. This can impact a bank holding company's ability to pay dividends and expand its business through the acquisition of subsidiaries if capital falls below the levels established by these guidelines. As of December 31, 1999 the Company's Tier 1, total risk-based capital and leverage ratios were in excess of minimum regulatory guidelines and the Bank's capital ratios also exceed the FDIC criteria for "well capitalized" banks. See Item 7 under "Capital Resources" and Item 8 under Note 9 to the consolidated financial statements for a more detailed discussion of the Risk Based Assessment System and the impact upon the Company and its subsidiary bank. Federal Deposit Insurance Under federal law, the FDIC has authority to impose special assessments on insured depository institutions, to repay FDIC borrowings from the United States Treasury or other sources, and to establish semi-annual assessment rates for Bank Insurance Fund (BIF) member banks to maintain the BIF at the designated reserve ratio required by law. Effective January 1, 2000 the FDIC Assessment Rate Schedule for BIF members ranged from zero for "well capitalized" institutions to $.27 per $100 for "undercapitalized" institutions. The Funds Act also authorized the Financing Corporation (FICO) to levy annual assessments of BIF-assessable deposits to service FICO bond obligations. Effective January 1, 2000, the BIF FICO assessment rate equals the FICO assessment rate that is applied to deposits assessable by the Savings Association Insurance Fund (SAIF). The annual assessment rates for FICO were determined from the September 30, 1999 call reports and, for both BIF and SAIF institutions, the rate was 2.12c per $100. On January 4, 2000 the Bank was assessed $44,838 for its quarterly FICO payment. The Bank is not restricted by the limitations on brokered deposits and can pass-through the $100,000 FDIC insurance coverage to each participant in or beneficiary of a qualified employee benefit plan. The Riegle/Neal Interstate Banking and Branching Efficiency Act of 1994 (The Interstate Banking Act) The Interstate Banking Act allows "adequately capitalized" and "adequately managed" bank holding companies to acquire banks in any state as of September 29, 1995. The Act also allows interstate merger transactions. The Interstate Banking Act amended the Bank Holding Company Act of 1956 authorizing the Federal Reserve to approve a bank holding company's application to acquire either control or substantial assets of a bank located outside of the bank holding company's home state regardless of whether the acquisition would be prohibited by state law. The Federal Reserve may approve these transactions only for "adequately capitalized" and "adequately managed" bank holding companies. 4 The Interstate Banking Act also amended the Federal Deposit Insurance Act to allow federal regulatory agencies to approve merger transactions between insured banks with different home states regardless of whether the transaction is prohibited under state law. Through interstate merger transactions, banks are able to acquire branches of out of state banks by converting their offices into branches of the resulting bank. The Act provides that it is the exclusive means for bank holding companies to obtain interstate branches. In these transactions, the resulting bank must remain "adequately capitalized" and "adequately managed" upon completion of the merger. The Act allowed each state the opportunity to "opt out", thereby prohibiting interstate branching within that state. Illinois has not adopted legislation to "opt out" of the interstate branching provisions. Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) The FIRREA broadened the regulatory powers of federal bank regulatory agencies. The original, primary purpose of FIRREA was to address the financial crisis in the thrift industry through the imposition of strict reforms on that industry. FIRREA also granted bank holding companies the right to acquire savings institutions. One of the provisions of FIRREA contains a "cross-guarantee" provision which can impose liability on the Company for losses incurred by the FDIC in connection with assistance provided to or the failure of any of the Company's insured depository institutions. The U.S. Court of Appeals Second Circuit has upheld the FDIC's power to charge losses from a bank failure to another bank in the same corporate organization. The Company, under Federal Reserve Board policy, is a source of financial strength to its subsidiary bank and is expected to commit resources to support the subsidiary bank. As a result, the Company could be required to commit resources to its subsidiary bank in circumstances where it might not do so absent such policies. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) The FDICIA significantly expanded the regulatory and enforcement powers of federal banking regulators. FDICIA gives federal banking regulators comprehensive directions to promptly direct or require the correction of problems of inadequately capitalized banks in a manner that is least costly to the Federal Deposit Insurance Fund. The degree of corrective regulatory involvement in the operations and management of banks and their holding companies will be largely determined by the actual or anticipated capital position of the institution. See Item 7 under "Capital Resources" and Item 8 under Note 9 to the consolidated financial statements detailing the Company's capital position. FDICIA also directed federal banking regulatory agencies to issue new and expanded safety and soundness standards governing operational and managerial activities of banks and their holding companies particularly in regard to internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth, executive compensation and market risk sensitivity. Gramm-Leach-Bliley Act The Gramm-Leach-Bliley Act of 1999 (the Act) was signed into law on November 12, 1999 and, among other things, lifts legislative restrictions placed on banking institutions to affiliate with securities firms, insurance companies and other financial institutions. The Act now permits bank holding companies that elect to become a Financial Holding Company (FHC) to engage in various financial activities that previously were prohibited, including underwriting, brokering and selling securities and insurance products; general equity investments and merchant banking activities; and any non-financial activity if "complementary" to a financial activity (as defined by the Federal Reserve Board). In order to become a FHC, a bank holding company's depository subsidiary must be: (i) "well capitalized"; (ii) well managed; and (iii) receive a "satisfactory" or better rating on its most recent Community Reinvestment Act compliance examination. It is anticipated that future regulations to be promulgated under the Act by the Federal Reserve Board and other functional regulatory agencies will have a significant impact as to the implementation and scope of the Act as it relates to bank holding companies that elect to become a FHC. 5 Other Laws and Regulations Proposals that change the laws and regulations governing banks, bank holding companies and other financial institutions are discussed in Congress, the state legislatures and before the various bank regulatory agencies. Banks are subject to numerous federal and state laws and regulations which have a material impact on their business. These include but are not limited to, usury laws, environmental laws, privacy laws, money laundering laws and numerous consumer protection laws and regulations. Year 2000 See Item 7 under "Year 2000 Compliance" for discussion of the Company's current position. Statistical Disclosure by Bank Holding Companies See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operation" for the statistical disclosure by bank holding companies. ITEM 2. Properties The Company's offices are located in Oak Brook, Illinois in the primary office of its subsidiary bank. The Company leases a small portion from Oak Brook Bank. The Bank and its branches conduct business in both owned and leased premises. At December 31, 1999 the Bank operated from seven owned and five leased properties. The Company believes its facilities are suitable and adequate to operate its banking business. For information concerning lease obligations, see Item 8 under Note 5 of the consolidated financial statements. In January 2000, the Bank signed a lease for the rental of property at Huron and Dearborn Streets in Chicago. This new branch is expected to open during the third quarter of 2000. ITEM 3. Legal Proceedings The Company and its subsidiary bank were not subject to any material pending or threatened legal actions as of December 31, 1999. No such actions have arisen subsequent to year-end. ITEM 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of shareholders during the fourth quarter of 1999. 6 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock trades on the Nasdaq Stock Market(R) under the symbol "FOBB". As of January 31, 2000, there were 332 holders of record and approximately 1,464 beneficial shareholders. See Item 8 under Notes 8, 12 and 13 of the consolidated financial statements for additional shareholder information. Stock Data/1/
Per Share ---------------------------------------------------- Diluted Net Dividends Book Low High Quarter Quarter Ended Income Paid Value Price/2/ Price/2/ End Price - ------------- ------- --------- ------ -------- -------- --------- December 31, 1999.......... $.41 $.100 $12.04 $18.00 $19.38 $18.50 September 30, 1999......... .40 .100 12.04 18.69 21.00 18.75 June 30, 1999.............. .39 .100 11.70 16.50 21.00 20.13 March 31, 1999............. .37 .100 11.76 17.44 19.00 17.44 December 31, 1998.......... .40 .090 11.46 17.75 20.25 18.50 September 30, 1998......... .37 .090 11.26 19.75 22.56 19.75 June 30, 1998.............. .32 .090 10.78 22.44 25.50 23.25 March 31, 1998............. .30 .075 10.69 20.75 25.44 25.00
- -------- /1 /On May 4, 1999, the shareholders approved the reclassification of the Common stock into the Class A common stock on a one for one basis. As a result, the Class A common stock is now the only class of outstanding common stock and has been renamed "Common Stock". Historical dividend and price information shown is that of the former Class A common stock. /2 /The prices shown represent the high and low closing sales prices for the quarter. 7 ITEM 6. Selected Financial Data The consolidated financial information which reflects a summary of the operating results and financial condition of First Oak Brook Bancshares, Inc. for the five years ended December 31, 1999 is presented in the following table. This summary should be read in conjunction with consolidated financial statements and accompanying notes included in Item 8 of this report. A more detailed discussion and analysis of financial condition and operating results is presented in Item 7 of this report. Earnings Summary and Selected Consolidated Financial Data
At and for the years ended December 31, ------------------------------------------------------------ 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (Dollars in thousands except per share data) Statement of Income Data Net interest income..... $ 32,337 $ 28,410 $ 27,432 $ 26,834 $ 25,476 Provision for loan losses................. 840 630 1,550 1,510 1,050 Net interest income after provision for loan losses............ 31,497 27,780 25,882 25,324 24,426 Other income............ 8,966 7,991 15,541/1/ 4,647 4,186 Other expenses.......... 25,640 22,423 20,708 20,435 19,924 Income before provision for income taxes....... 14,823 13,348 20,715 9,536 8,688 Provision for income taxes.................. 4,277 3,907 6,962 2,429 1,996 Net income.............. $ 10,546 $ 9,441 $ 13,753 $ 7,107 $ 6,692 Common Stock Data/2/ Basic earnings per share.................. $ 1.60 $ 1.42 $ 2.09 $ 1.06 $ 1.00 Diluted earnings per share.................. 1.57 1.39 2.03 1.03 .98 Cash dividends paid per share/3............./.. .40 .345 .270 .190 .158 Book value per share.... 12.04 11.46 10.38 8.62 8.23 Closing price of Common Stock per share/3/ High.................. 21.00 25.50 25.19 12.75 10.75 Low................... 16.50 17.75 11.38 10.25 8.25 Year-End.............. 18.50 18.50 24.00 11.63 10.32 Dividends per share to closing price.......... 2.2% 1.9% 1.1% 1.6% 1.5% Closing price to diluted earnings per share..... 11.8x 13.3x 11.8x 11.3x 10.5x Market capitalization... $ 120,829 $ 121,783 $ 160,477 $ 78,458 $ 69,409 Period end shares outstanding............ 6,531,314 6,582,840 6,686,560 6,746,186 6,725,684 Volume of shares traded................. 1,656,449 1,908,594 3,447,438 1,133,042 2,011,048 Year-End Balance Sheet Data Total assets............ $1,146,356 $1,009,275 $ 816,144 $ 768,655 $ 678,102 Loans, net of unearned discount............... 719,969 631,987 447,332 420,164 362,728 Allowance for loan losses................. 4,828 4,445 4,329 4,109 3,932 Investment securities... 348,607 297,674 302,098 265,954 256,192 Demand deposits......... 196,243 187,209 153,806 147,497 128,236 Total deposits.......... 894,072 777,802 627,763 648,303 555,086 Federal Home Loan Bank borrowings............. 63,000 57,500 42,500 -- 3,500 Shareholders' equity.... 79,999 77,061 71,661 59,553 53,762
8
At and for the years ended December 31, ---------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- Financial Ratios (Dollars in thousands except per share data) Return on average assets................. .99% 1.02% 1.76% .97% 1.03% Return on average equity................. 13.30 12.74 21.72 12.77 14.00 Net interest margin..... 3.35 3.43 3.97 4.20 4.54 Net interest spread..... 2.35 2.34 2.86 3.23 3.57 Dividend payout ratio... 24.62 24.17 12.43 18.63 14.63 Capital Ratios Average equity to average total assets... 7.41% 8.00% 8.11% 7.59% 7.39% Tier 1 capital ratio.... 10.05 10.20 13.70 12.66 13.33 Total capital ratio..... 10.65 10.80 14.55 13.54 14.32 Capital leverage ratio.. 7.12 7.61 8.57 7.69 7.94 Asset Quality Ratios Nonperforming loans to total loans............ .05% .04% .09% .49% .03% Nonperforming assets to total loans and other real estate owned...... .05 .04 .09 .49 .03 Nonperforming assets to total capital.......... .47 .35 .53 3.49 .19 Allowance for loan losses to total loans.. .67 .70 .97 .98 1.08 Net charge-offs to average loans.......... .07 .10 .32 .34 .30 Allowance for loan losses to nonperforming loans.................. 12.98x 16.34x 11.45x 1.98x 37.81x
- -------- /1 /Included in other income in 1997 was the $9,251,000 gain on the sale of our credit card portfolio. /2 /Common Stock data has been restated to give effect to the 100% stock dividend effective September 3, 1998. /3 /On May 4, 1999, the shareholders approved the reclassification of the Common stock into Class A common stock on a one for one basis. As a result, the Class A common stock is now the only class of outstanding common stock and has been renamed "Common Stock". Historical dividend and price information shown is that of the former Class A common stock. 9 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operation RESULTS OF OPERATIONS The following discussion and analysis provides information about the financial condition and results of operations of First Oak Brook Bancshares, Inc. (the Company) for the years ended December 31, 1999, 1998 and 1997. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto included in this report. Assets at year-end reached a record high of $1.15 billion, up 14% from total assets of $1.01 billion at December 31, 1998. Increased marketing efforts and competitive pricing contributed to the strong asset growth. Total equity also reached a record level of $80 million at December 31, 1999 an increase of 4% over prior year total equity of $77 million. The Company's capital ratios continued to exceed the minimum regulatory guidelines and the subsidiary bank's capital ratios exceed the minimum ratios for "well- capitalized" banks as defined by the FDIC. Earnings The Company's consolidated net income, earnings per share and selected ratios for 1999, 1998 and 1997 were as follows:
1997/1/ ----------------------- 1999 1998 Reported Core ----------- ---------- ----------- ---------- Net income................... $10,546,000 $9,441,000 $13,753,000 $8,670,000 Basic earnings per share..... $ 1.60 $ 1.42 $ 2.09 $ 1.31 Diluted earnings per share... $ 1.57 $ 1.39 $ 2.03 $ 1.28 Return on average assets..... .99% 1.02% 1.76% 1.11% Return on average equity..... 13.30% 12.74% 21.72% 13.69%
- -------- /1 /For 1997, reported net income includes the $5.1 million after-tax gain from the sale of the credit card portfolio. Core net income excludes this gain. 1999 versus 1998 The 1999 results compared to 1998 include the following significant pre-tax components: . Net interest income rose $3,927,000 due primarily to a 14% increase in average earning assets offset by a 2% decrease in the net interest margin. . The provision for loan losses increased $210,000 based on management's periodic evaluation of the risks inherent in the loan portfolio and the growth of the portfolio during the year. . Other income increased $975,000 primarily due to higher fee income from cash management, investment management and trust, and merchant credit card processing. . Other expenses rose $3,217,000 primarily due to additions to staff and compensation increases, higher merchant credit card interchange expenses and costs associated with new branches in Glen Ellyn (opened in September 1998) and LaGrange (opened in September 1999) which contributed to higher operating expenses. 1998 versus 1997 The 1998 results compared to 1997 include the following significant pre-tax components: . Net interest income rose $978,000 due to a 20% increase in average earning assets, primarily loans, offset by a 14% decrease in the net interest margin. 10 . The provision for loan losses decreased by $920,000 primarily due to the sale of the credit card portfolio in 1997. Since virtually all of the historical charge-offs were related to the credit card portfolio, and the Company continued to have low levels of non-performing loans, the provision for 1998 was reduced. . Other income, excluding the gain on the sale of the credit card portfolio in 1997, increased $1,701,000 primarily due to an increase in fee income from cash management, income earned from the revenue sharing agreement on the credit card portfolio sale, merchant credit card processing, and the net gain on mortgages sold in the secondary market. . Other expenses increased $1,715,000 primarily due to additions to staff and compensation increases, higher occupancy and equipment expenses related to the two new branches opened in 1998 and merchant interchange expense. In addition, included in the 1997 other expenses was a $300,000 contribution to the Oak Brook Bank Charitable Trust and a gain of $515,000 recorded on the sale of surplus property formerly leased to a third party. Net Interest Income Net interest income is the difference between interest earned on loans, investments and other earning assets and interest paid on deposits and other interest-bearing liabilities. Net interest income is the principal source of the Company's revenues. 1999 versus 1998 On a tax-equivalent basis, net interest income for 1999 totaled $33,643,000, an increase of 14% over 1998. This increase is attributable to a 16% increase in average earning assets offset by an 8 basis point decrease in the net interest margin to 3.35% in 1999 from 3.43% in 1998. The change in net interest income was a result of the following: . During 1999, average loans increased $155 million primarily in the indirect auto ($57 million), commercial real estate ($48 million), commercial ($31 million), residential real estate ($14 million) and home equity ($9 million) portfolios. The increase in volume was partially offset by the 42 basis point decrease in the average yield on the loan portfolio. Compression of the loan yields was a result of competitive pricing and a decrease in average interest rates. See "Loans" for further details of yields by loan type. . The average cost of interest-bearing liabilities decreased to 4.70% in 1999 from 4.95% in 1998. The 1999 average balance of higher rate time deposits increased $84 million compared to 1998, while the 1999 average balance of lower rate savings and NOW accounts and money market accounts increased at a slower rate as compared to 1998. To fund the loan growth the Company ran successful retail deposit promotions during the year. In addition, average short-term debt increased $13 million and the Company continued to utilize Federal Home Loan Bank borrowings at lower long term rates than it would have had to pay on similar term deposits. 1998 versus 1997 On a tax-equivalent basis, net interest income for 1998 totaled $29,589,000, an increase of 4% over 1997. This increase is attributable to a 20% increase in average earning assets offset by a 54 basis point decrease in the net interest margin to 3.43% in 1998 from 3.97% in 1997. The compression of the net interest margin was a result of the following: . During 1998, average loans increased $104 million primarily in the indirect auto ($56 million), commercial ($29 million), commercial real estate ($26 million), residential real estate ($13 million) 11 and home equity ($9 million) loan portfolios offset by a decrease in the credit card portfolio ($27 million). Further compression of the loan yields was due to the competitive pricing as well as the slight decrease in interest rates. . While rates paid on the individual components of interest-bearing liabilities dropped, the overall cost of interest-bearing liabilities increased from 4.89% in 1997 to 4.95% in 1998. This increase was primarily due to increased volume of the higher-cost interest-bearing liabilities, primarily time deposits and FHLB borrowings. The average time deposit balance increased $69 million. The average balance of FHLB borrowings increased $42 million at a long-term average rate of 5.80%. 12 The following table presents the average interest rate on each major category of interest-earning assets and interest-bearing liabilities for 1999, 1998, and 1997. Average Balances and Effective Interest Rates
1999 1998 1997 --------------------------- ------------------------- ------------------------- Interest Interest Interest Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rates Balance Expense Rates Balance Expense Rates ---------- -------- ------ -------- -------- ------ -------- -------- ------ (Dollars in thousands) Assets Earning assets: Federal funds sold and securities purchased under agreements to resell............... $ 22,267 $ 1,118 5.02% $ 38,904 $ 2,106 5.41% $ 8,325 $ 460 5.52% Interest-bearing deposits with banks.. 5,862 401 6.84 11,230 764 6.81 5,260 362 6.89 Taxable securities.... 246,524 15,136 6.14 240,674 15,489 6.44 243,341 15,090 6.20 Tax exempt securities/1....../.. 52,668 3,850 7.31 50,197 3,567 7.11 46,638 3,489 7.48 Loans, net of unearned discount/1/,/2..../.. 675,932 50,261 7.44 521,072 40,949 7.86 416,758 36,445 8.75 ---------- ------- ---- -------- ------- ---- -------- ------- ---- Total earning assets/interest income................ $1,003,253 $70,766 7.05% $862,077 $62,875 7.29% $720,322 $55,846 7.75% Cash and due from banks................. 39,867 40,081 39,611 Other assets........... 31,236 28,379 25,237 Allowance for loan losses................ (4,576) (4,092) (4,431) ---------- -------- -------- $1,069,780 $926,445 $780,739 ========== ======== ======== Liabilities and Shareholders' Equity Interest-bearing liabilities: Savings and NOW accounts.............. $ 172,452 $ 4,765 2.76% $171,067 $ 5,711 3.34% $172,533 $ 6,159 3.57% Money market accounts............. 48,112 1,648 3.43 40,139 1,302 3.24 34,071 1,089 3.20 Time deposits......... 431,150 23,428 5.43 346,807 20,016 5.77 277,727 16,125 5.81 Short-term debt....... 71,828 3,412 4.75 59,110 3,014 5.10 59,881 3,101 5.18 FHLB borrowings....... 66,922 3,870 5.78 55,917 3,243 5.80 13,438 781 5.82 ---------- ------- ---- -------- ------- ---- -------- ------- ---- Total interest-bearing liabilities/interest expense.............. $ 790,464 $37,123 4.70% $673,040 $33,286 4.95% $557,650 $27,255 4.89% Demand deposits........ 189,448 170,146 151,257 Other liabilities...... 10,556 9,159 8,523 ---------- -------- -------- Total liabilities...... $ 990,468 $852,345 $717,430 Shareholders' equity... 79,312 74,100 63,309 ---------- -------- -------- $1,069,780 $926,445 $780,739 ========== ======== ======== Net interest income/net interest spread/3../.. $33,643 2.35% $29,589 2.34% $28,591 2.86% Net interest margin/4.........../.. 3.35% 3.43% 3.97%
- -------- /1 /Tax equivalent basis. Interest income and average yield on tax exempt loans and investment securities include the effects of tax equivalent adjustments using a tax rate of 34% in 1999 and 1998 and 35% in 1997. /2 /Includes nonaccrual loans. /3 /Total yield on average earning assets, less total rate paid on average interest-bearing liabilities. /4 /Total interest income, tax equivalent basis, less total interest expense, divided by average earning assets. 13 The following table presents a summary analysis of changes in interest income and interest expense for 1999 as compared to 1998 and 1998 as compared to 1997. Interest income rose in 1999 primarily due to the higher volume of average loans offset by a decrease in the average loan yields. Interest expense rose in 1999 due to increased volume of time deposits and borrowings offset by a decrease in the rates paid. Interest income rose in 1998 due to the higher volume of loans and federal funds sold offset by a decline in average loan yields. Interest expense rose in 1998 due to the increased volume of time deposits and FHLB borrowings offset by a decrease in rates paid. Analysis of Net Interest Income Changes
1999 Over 1998 1998 Over 1997 ------------------------- ------------------------- Volume/1/ Rate/1/ Total Volume/1/ Rate/1/ Total --------- ------- ------ --------- ------- ------ (Dollars in thousands) Increase (decrease) in interest income: Federal funds sold...... $ (844) $ (144) $ (988) $ 1,656 $ (10) $1,646 Interest-bearing deposits with banks.... (366) 3 (363) 407 (5) 402 Taxable securities...... 370 (723) (353) (166) 565 399 Tax exempt securities/2......../.. 179 104 283 258 (180) 78 Loans, net of unearned discount/2/,/3....../.. 11,616 (2,304) 9,312 8,464 (3,960) 4,504 ------- ------- ------ ------- ------- ------ Total interest income... $10,955 $(3,064) $7,891 $10,619 $(3,590) $7,029 ------- ------- ------ ------- ------- ------ Increase (decrease) in interest expense: Savings & NOW accounts.. $ 46 $ (992) $ (946) $ (52) $ (396) $ (448) Money market accounts... 270 76 346 197 16 213 Time deposits........... 4,638 (1,226) 3,412 3,988 (97) 3,891 Short-term debt......... 615 (217) 398 (40) (47) (87) FHLB borrowings......... 636 (9) 627 2,464 (2) 2,462 ------- ------- ------ ------- ------- ------ Total interest expense.. $ 6,205 $(2,368) $3,837 $ 6,557 $ (526) $6,031 ------- ------- ------ ------- ------- ------ Increase (decrease) in net interest income.... $ 4,750 $ (696) $4,054 $ 4,062 $(3,064) $ 998 ======= ======= ====== ======= ======= ======
- -------- 1 The change in interest due to both rate and volume has been allocated proportionately. 2 Tax equivalent basis. Tax exempt loans and investment securities include the effects of tax equivalent adjustments using a tax rate of 34% in 1999 and 1998 and 35% in 1997. 3 Includes nonaccrual loans. Allowance and Provision for Loan Losses The allowance for loan losses is maintained at a level believed adequate by management to absorb estimated probable loan losses. Management's periodic evaluation of the adequacy of the allowance is based on the Company's past loan loss experience, peer loan loss experience, known and inherent risks in the portfolio, composition of the loan portfolio, current economic conditions, and other relevant factors. Loans which are determined to be uncollectible are charged off against the allowance for loan losses and recoveries of loans that were previously charged off are credited to the allowance. The Company's charge-off policy varies with respect to the category of and specific circumstances surrounding each loan under consideration. The Company records charge-offs on the basis of management's ongoing evaluation of collectibility. In addition, any loans which are classified as "loss" in regulatory examinations are charged off. The Company records specific valuation allowances on commercial, commercial mortgage and construction loans when a loan is considered to be impaired. A loan is impaired when, based on an evaluation of current information and events, it is probable that the Company will not be able to collect all amounts due (principal and 14 interest) pursuant to the original contractual terms. The Company measures impairment based upon the present value of expected future cash flows discounted at the loan's original effective interest rate or the fair value of the collateral if the loan is collateral dependent. Large groups of homogeneous loans, such as residential mortgage, home equity, indirect auto and consumer loans, are collectively evaluated for impairment. Interest income on impaired loans is recognized using either the cash basis method or a cost recovery method depending upon the circumstances. The following table summarizes the loan loss experience for each of the last five years. Summary of Loan Loss Experience
1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (Dollars in thousands) Average loans for the year, net of unearned discount and allowance for loan losses... $671,356 $516,980 $412,327 $388,433 $321,183 -------- -------- -------- -------- -------- Allowance for loan losses, beginning of the year....... $ 4,445 $ 4,329 $ 4,109 $ 3,932 $ 3,859 Charge-offs for the year: Real estate--construction.. -- -- (200) -- -- Real estate mortgage and home equity loans......... (1) -- (20) -- -- Commercial loans........... (357) -- -- -- -- Indirect auto loans........ (130) (31) (39) (14) (3) Credit card loans.......... (32) (188) (1,237) (1,484) (1,096) Overdraft loans............ (4) (458) (4) (11) (3) Consumer loans............. (4) (52) (5) (2) (10) -------- -------- -------- -------- -------- Total charge-offs........ (528) (729) (1,505) (1,511) (1,112) -------- -------- -------- -------- -------- Recoveries for the year: Real estate mortgage and home equity loans......... 1 -- -- -- -- Commercial loans........... 4 11 1 33 41 Indirect auto loans........ 5 20 8 11 -- Credit card loans.......... 61 181 166 126 81 Overdraft loans............ -- 1 -- -- -- Consumer loans............. -- 2 -- 8 13 -------- -------- -------- -------- -------- Total recoveries......... 71 215 175 178 135 -------- -------- -------- -------- -------- Net charge-offs for the year........................ (457) (514) (1,330) (1,333) (977) Provision for loan losses.... 840 630 1,550 1,510 1,050 -------- -------- -------- -------- -------- Allowance for loan losses, end of the year............. $ 4,828 $ 4,445 $ 4,329 $ 4,109 $ 3,932 ======== ======== ======== ======== ======== Ratio of net charge-offs to average loans outstanding... .07% .10% .32% .34% .30% Allowance for loan losses as a percent of loans outstanding, net of unearned discount at end of the year........................ .67% .70% .97% .98% 1.08% Ratio of allowance for loan losses to nonperforming loans....................... 12.98x 16.34x 11.45x 1.98x 37.81x
The provision for loan losses increased $210,000 in 1999 as compared to 1998, due primarily to the increase of loans outstanding. However, despite average growth in the loan portfolio of 30%, the Company has continued to have low levels of nonperforming loans and net charge-offs. 15 The provision for loan losses decreased $920,000 in 1998 as compared to 1997. Prior to 1998, primarily all of the Company's charge-offs had been related to the credit card portfolio. Since the credit card portfolio was sold in 1997 and the Company continued to have very low levels of nonperforming loans, management decreased the provision in 1998. Currently and historically, the Company has had high asset quality. Net charge-offs for 1999 totaled $457,000 or .07% of average loans. Of total net charge-offs, $282,000 related to one commercial loan relationship. See nonperforming assets table for historical information. The Company's allowance for loan losses as a percent of loans outstanding was .67% at December 31, 1999 as compared to .70% in 1998 and .97% in 1997. Management believes the allowance for loan losses is at an adequate level. The provision for loan losses is sufficient to provide for probable loan losses and maintain the allowance at an adequate level commensurate with management's evaluation of the risks inherent in the loan portfolio. Management of the subsidiary bank prepares a detailed analysis, at least quarterly, reviewing the adequacy of its allowance and, when appropriate, recommending an increase or decrease in its provision for loan losses. The analysis to determine the allocated portion of the allowance is divided into two parts. The first part involves primarily an estimated calculation of losses on specific problem and management watch list loans, the remaining credit card portfolio and delinquent consumer loans. The second part involves primarily a calculation of the bank's actual net charge-off history averaged with industry net charge-off history by major loan categories including unfunded commitments. In addition, the bank considers its loan growth, management capabilities, economic trends, credit concentrations, industry risks, underlying collateral values and the opinions of bank management. Accordingly, because each of these criteria is subject to change, the allocation of the allowance is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the portfolio. In order to identify potential risks in the loan portfolio and determine the necessary provision for loan losses, detailed information is obtained from the following sources: . Regular reports prepared by the bank's management which contain information on the overall characteristics of the loan portfolio, including delinquencies and nonaccruals, and specific analysis of loans requiring special attention (i.e. "watch lists"); . Examinations of the loan portfolio of the subsidiary bank by Federal and State regulatory agencies; and . Reviews by third-party consultants and internal audit staff. In addition to management's assessment of the portfolio, the Company and the subsidiary bank are examined periodically by regulatory agencies. Although such agencies do not determine whether the allowance for loan loss is adequate, their examinations may result in increases to the allowance based on their judgements about information available to them at the time of their examination. 16 The following table considers both parts of the analysis discussed above to determine the allocation of the allowance for loan losses by loan type for each of the last five years. Allocation of Allowance for Loan Losses
December 31, -------------------------------------- 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ (Dollars in thousands) Allocation of allowance for loan losses: Real estate--land acquisition and construction loans.................. $ 29 $ 25 $ 22 $ 482 $ 272 Real estate mortgage and home equity loans............................... 410 211 113 209 366 Commercial loans..................... 428 523 123 98 194 Indirect auto loans.................. 793 496 105 178 186 Consumer loans....................... 35 30 24 45 72 Credit card loans.................... 85 213 287 2,404 1,863 Unallocated.......................... 3,048 2,947 3,655 693 979 ------ ------ ------ ------ ------ Total allowance.................... $4,828 $4,445 $4,329 $4,109 $3,932 ====== ====== ====== ====== ====== Percentage of loans to gross loans: Real estate--land acquisition and construction loans.................. 3.1% 6.6% 8.2% 8.5% 7.9% Real estate mortgage and home equity loans............................... 50.5 48.2 52.6 50.5 50.6 Commercial loans..................... 14.9 17.2 12.2 9.7 10.5 Indirect auto loans.................. 29.9 26.1 23.7 13.9 10.8 Consumer loans....................... 1.6 1.9 3.2 3.6 4.1 Credit card loans.................... -- -- 0.1 13.8 16.1 ------ ------ ------ ------ ------ 100.0% 100.0% 100.0% 100.0% 100.0% ====== ====== ====== ====== ======
Nonperforming Assets The accrual of interest is discontinued on commercial and real estate loans when the continuity of contractual principal or interest is deemed doubtful by management or when 90 days or more past due and the loan is not well secured or in the process of collection. Interest income is recorded on these loans only as it is collected. Interest payments on nonaccrual loans which contain unusual risk features or marginal collateral values may be applied directly to loan principal for accounting purposes. The following table highlights the Company's nonperforming assets.
December 31, ------------------------------ 1999 1998 1997 1996 1995 ---- ---- ---- ------ ---- (Dollars in thousands) Nonaccruing loans............................. $ 90 $-- $-- $1,730 $-- Loans which are past due 90 days or more...... 282 272 378 349 104 ---- ---- ---- ------ ---- Total nonperforming loans................... 372 272 378 2,079 104 Other real estate owned....................... -- -- -- -- -- ---- ---- ---- ------ ---- Total nonperforming assets.................. $372 $272 $378 $2,079 $104 ---- ---- ---- ------ ---- Nonperforming loans to total loans outstanding.................................. .05% .04% .09% .49% .03% Nonperforming assets to total loans outstanding and other real estate owned...... .05% .04% .09% .49% .03% Nonperforming assets to total assets.......... .03% .03% .05% .27% .02% Nonperforming assets to total capital......... .47% .35% .53% 3.49% .19%
The Company's ratio of nonperforming loans to total loans outstanding and other real estate owned of .05% at December 31, 1999 was well below the industry peer group ratio of .83%/1/. - -------- 1 Source: SNL DataSource, nationwide banks with asset size of $1 to $2 billion. 17 Summary of Other Income The following table summarizes significant components of other income and percentage changes from year to year:
% Change --------------- 1999 1998 1997 '99-'98 '98-'97 ------ ------ ------- ------- ------- (Dollars in thousands) Service charges......................... $3,600 $3,190 $ 2,730 13% 17% Investment management and trust fees.... 1,128 1,048 1,025 8 2 Merchant card processing fees........... 1,858 1,329 964 40 38 Fees on mortgages sold.................. 422 416 224 1 86 Income from revenue sharing agreement... 900 900 450 -- 100 Other operating income.................. 979 1,029 906 (5) 14 Investment securities gains (losses).... 79 79 (9) -- 977 Gain on sale of credit card portfolio... -- -- 9,251 -- -- ------ ------ ------- --- --- Total................................... $8,966 $7,991 $15,541 12% (49)% ====== ====== ======= === ===
1999 versus 1998 Service charges on deposit accounts increased $410,000 primarily due to an increase in business account analysis fees. Investment management and trust department income increased $80,000, primarily due to an increase in assets under investment management and other new trust business. Discretionary assets under investment management grew $50 million to $245 million at December 31, 1999 from $195 million at December 31, 1998. Merchant credit card processing fees increased $529,000 primarily due to new merchant accounts and rate increases as a result of higher interchange fees. The number of merchant outlets serviced increased to 262 at year-end 1999 from 202 at year-end 1998. Merchant interchange expense (in the other expense section) rose $425,000 in 1999. Fees on mortgages sold, servicing released, increased just slightly in 1999. The mortgage market was strong through the first half of 1999; however, due to rising interest rates, mortgage loan refinance activity slowed down in the second half of the year. This fee income for 1999 represents the gain on mortgages sold of $629,000 net of $207,000 in commissions paid to the mortgage originators. Income from the revenue sharing agreement made in connection with the sale of the credit card portfolio in 1997 remained constant at $900,000 for both 1999 and 1998. Under the agreement, the Company shares the revenue from the sold portfolio until June of 2002, subject to a maximum annual payment of $900,000. 1998 versus 1997 Service charges on deposit accounts increased $460,000 primarily due to an increase in business account analysis fees. Investment management and trust department income increased $23,000, primarily due to an increase in assets under investment management and other new trust business offset by a change in the billing cycle that took place in 1997. The change in the billing cycle resulted in additional fee income recorded in 1997 of approximately $147,000. Absent this 1997 change, investment management and trust income increased $170,000 in 1998 due to an increase in discretionary assets under investment management to $195 million at December 31, 1998 from $134 million at December 31, 1997. 18 Merchant credit card processing fees increased $365,000 primarily due to new merchants accounts. The number of merchants serviced increased to 202 at year- end 1998 from 170 at year-end 1997. Merchant interchange expense (in the other expense section) rose $297,000 in 1998. Fees on mortgages sold, servicing released, increased $192,000 due to increased residential loan originations. This fee income for 1998 represents the gain on mortgages sold of $711,000 net of $295,000 in commissions paid to the mortgage originators. Income from the revenue sharing agreement made in connection with the sale of the credit card portfolio on June 30, 1997 increased $450,000 to $900,000 due to the recognition of twelve months of income in 1998 compared to only six months of income in 1997. The increase in other operating income of $123,000 was primarily attributable to the recognition of a full year of ATM surcharge fees in 1998. This program began in 1997 and therefore only a partial year of income was recognized in that year. Summary of Other Expenses The following table summarizes significant components of other expenses and percentage changes from year to year:
%Change --------------- 1999 1998 1997 '99-'98 '98-'97 ------- ------- ------- ------- ------- (Dollars in thousands) Salaries and employee benefits......... $15,817 $13,680 $12,293 16% 11% Occupancy expense...................... 1,683 1,566 1,457 7 7 Equipment expense...................... 1,824 1,906 1,566 (4) 22 Data processing........................ 968 776 1,301 25 (40) Professional fees...................... 576 522 398 10 31 Postage, stationery and supplies....... 865 834 768 4 9 Advertising and business development... 1,231 1,090 1,191 13 (8) Merchant interchange expense........... 1,419 994 697 43 43 FDIC premiums.......................... 92 81 78 14 4 Other operating expenses............... 1,165 974 959 20 2 ------- ------- ------- --- --- Total.................................. $25,640 $22,423 $20,708 14% 8% ======= ======= ======= === ===
1999 versus 1998 Other expenses rose $3,217,000 or 14% in 1999 over 1998. Other expenses as a percentage of average assets remained constant at 2.4% for 1999 and 1998. Net overhead expenses as a percentage of average earning assets also remained constant at 1.7% for both years and the efficiency ratio (other expenses to net interest income and other income) was 62.1% in 1999 and 61.6% in 1998. Salaries and employee benefits increased $2,137,000 or 16%. This increase was primarily the result of increased levels of performance based compensation, normal salary and benefit increases, higher compensation due to competitive market conditions and increased staffing requirements for the new LaGrange office (opened in September 1999), the Glen Ellyn office (opened in September 1998) and other growing areas of the bank. Occupancy and Equipment expense combined increased $35,000 primarily due to the new LaGrange office and a full year of operations at the Glen Ellyn office that opened in September, 1998. These increases are offset by lower depreciation expense due to certain assets having become fully depreciated in 1999. Data processing fees increased $192,000 primarily as a result of additional trust processing fees and costs incurred for the testing of the Company's operating systems for compliance with the Year 2000 date change. 19 Professional fees increased $54,000 in 1999 primarily due to additional services related to the changes in corporate structure approved by the shareholders at the 1999 annual meeting. Advertising and business development increased $141,000 due primarily to additional advertising campaigns for retail loans and deposits. Merchant interchange expense increased $425,000 due to new merchants and increased interchange fees. Note, merchant card processing fees (in other income) rose $529,000 in 1999. Other operating expenses increased $191,000 primarily due to higher corporate expenses and other costs necessary to support the growing areas of the Bank. 1998 versus 1997 Other expenses rose $1,715,000 or 8% in 1998 over 1997. Salaries and employee benefits increased $1,387,000 due to normal salary increases, a highly competitive job market and increased requirements for staff in the new Aurora and Glen Ellyn branches and other growing areas of the bank. These additional salaries were partially offset by the elimination of salaries due to the sale of the credit card portfolio in 1997. Occupancy and equipment expenses increased $449,000 over 1997 due to the opening of the new Aurora and Glen Ellyn branches, an upgrade to the mainframe computer system, and the purchase of a new imaging system and check sorter during 1998. Data processing fees decreased $525,000 and advertising and business development decreased $101,000 due to the sale of the credit card portfolio in 1997. Merchant interchange expense increased $297,000 due to new merchants. Note, merchant card processing fees (in other income) rose $365,000 in 1998. Other operating expenses increased $15,000 primarily due to two "non-core" items in 1997. During 1997, the Company recorded a gain on the sale of surplus property of $515,000 which was included as a reduction of other expense. This transaction was offset by a $300,000 contribution to the Oak Brook Bank Charitable Trust established in December 1997. Income Tax Expense Income taxes for 1999 totaled $4,277,000 as compared to $3,907,000 for 1998 and $6,962,000 in 1997. When measured as a percentage of income before income taxes, the Company's effective tax rate was 29% for 1999 and 1998 compared to 34% in 1997. The decrease in the provision for income taxes and the effective tax rate for 1998 as compared to 1997 was due to an additional $3.3 million tax provision recorded in 1997 on the gain on the sale of the credit card portfolio. FINANCIAL CONDITION Liquidity Effective management of balance sheet liquidity is necessary to fund growth in earning assets and to pay liability maturities, depositors' withdrawal requirements, shareholders' dividends and to purchase Treasury stock under the stock repurchase program. The Company has numerous sources of liquidity including a portfolio of shorter-term assets, readily marketable investment securities, the ability to attract consumer time deposits and access to various borrowing arrangements. 20 Available borrowing arrangements are summarized as follows: Subsidiary Bank: . Informal Federal funds lines aggregating $98 million with five correspondent banks, subject to continued good financial standing. As of December 31, 1999, all $98 million was available for use under these lines. . Reverse repurchase agreement lines totaling $350 million with four brokerage firms, subject to the availability of collateral and continued good financial standing of the Bank. As of December 31, 1999, $245 million was available to the Bank under these lines. . Additional advances from the Federal Home Loan Bank of Chicago are available based on the pledge of specific collateral and FHLB stock ownership. As of December 31, 1999, $21.4 million is available to the Bank under the FHLB agreements. . The Bank has a borrowing line of approximately $194 million at the discount window of the Federal Reserve Bank, subject to the availability of collateral. Parent Company: . Revolving credit arrangement for $15 million. At December 31, 1999, the line was unused and matures on April 1, 2000. It is anticipated to be renewed annually. . The parent company also had cash, short-term investments and other marketable securities totaling $1.9 million at December 31, 1999. Interest Rate Sensitivity Interest rate risk arises when the maturity or repricing of assets differs significantly from the maturity or repricing of liabilities. The Company's financial results could be affected by changes in market interest rates such as the prime rate, LIBOR and treasury yields as well as competitive rates for retail deposit products. The objective of interest rate risk management is to provide the maximum levels of net interest income while maintaining acceptable levels of interest rate risk and liquidity risk. A number of measures are used to monitor and manage interest rate risk, including income simulation, rate shock analysis and interest sensitivity (gap) analysis. An income simulation model is the primary tool used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. The model incorporates management assumptions regarding the level of interest rate or balance changes on indeterminate maturity deposit products (passbook savings, money market, NOW and demand deposits) for a given level of market rate changes. These assumptions are developed through historical analysis. Additionally, changes in prepayment behavior of the mortgage related assets in each rate environment are captured using estimates of prepayment speeds for the portfolios. Other assumptions in the model include cash flows and maturities of other financial instruments, changes in market conditions, loan volumes and pricing, and customer preferences. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. The Company's policy objective is to limit the change in annual net interest income to 10% from an immediate and sustained parallel change in interest rates (rate shock) of 200 basis points. As of December 31, 1999 and 1998, the Company had the following estimated net interest income sensitivity profile. The impact of planned growth and anticipated new business activities is not factored into the calculation.
1999 1998 ---------------- --------------- -200 bp +200 bp -200 bp +200 bp ------- ------- ------- ------- Annual interest income change from an immediate change in rates............... $1,856 $(2,562) $789 $(1,629) Percent change........................... 5.4% (7.4)% 2.5% (5.1)%
21 The table below presents a static gap analysis as of December 31, 1999 which does not fully capture the true dynamics of interest rate changes including the timing and/or degree of interest rate changes. While most of the asset categories' rates change when certain independent indices (such as the prime rate) change, most liability categories are repriced at the Company's discretion subject, however, to competitive interest rate pressures. Interest Rate Sensitive Position
1-90 91-180 181-365 Over 1 days days days year Total --------- --------- --------- ---------- ---------- (Dollars in thousands) Rate sensitive assets: Federal funds sold and interest-bearing deposits with banks.. $ 488 $ -- $ -- $ -- $ 488 Taxable securities.... 38,601 9,489 48,707 199,442 296,239 Tax exempt securities........... 595 -- 520 51,253 52,368 Loans, net of unearned discount............. 213,427 45,170 78,946 382,426 719,969 --------- --------- --------- ---------- ---------- Total............... $ 253,111 $ 54,659 $ 128,173 $ 633,121 $1,069,064 --------- --------- --------- ---------- ---------- Cumulative total.... $ 253,111 $ 307,770 $ 435,943 $1,069,064 --------- --------- --------- ---------- Rate sensitive liabilities: Savings and NOW accounts/1......../.. $ 78,677 $ 1,787 $ 4,468 $ 86,203 $ 171,135 Money market accounts............. 57,186 -- -- -- 57,186 Time deposits......... 181,158 97,765 96,191 94,394 469,508 Borrowings............ 83,645 9,663 9,700 58,000 161,008 --------- --------- --------- ---------- ---------- Total............... $ 400,666 $ 109,215 $ 110,359 $ 238,597 $ 858,837 --------- --------- --------- ---------- ---------- Cumulative total.... $ 400,666 $ 509,881 $ 620,240 $ 858,837 --------- --------- --------- ---------- Cumulative gap.......... $(147,555) $(202,111) $(184,297) $ 210,227 --------- --------- --------- ---------- Cumulative gap to total assets ratio........... (12.9)% (17.6)% (16.1)% 18.3% --------- --------- --------- ----------
- -------- /1 /The decay assumptions on savings and NOW accounts are based on historical analysis and experience. Investment Securities The Company's investment portfolio increased $50.9 million, or 17%, during 1999 to $348.6 million at year-end from $297.7 million at year-end 1998. The Company has continued its strategy to minimize state income taxes by primarily investing in state income tax exempt U.S. Government agency securities, and to a lesser extent, U.S. Treasury securities. Due to the yield advantages, U.S. Government agency securities were favored over their U.S. Treasury counterparts. U.S. Treasury Securities: The Company increased its holdings of U.S. Treasuries by $6.9 million to $57.3 million at year-end from $50.4 million at year-end 1998. The average maturity of the U.S. Treasury portfolio increased to 1.9 years in 1999 from 1.3 years in 1998. U.S. Government Agency and Mortgage Backed Securities: The U.S. Government agency securities (including U.S. Government agency mortgage backed securities and agency collateralized mortgage obligations) portfolio increased $87.0 million in 1999 to $224.8 million at year-end from $137.8 million at year-end 1998. The increase was primarily due to the continued strategy to minimize state tax liability, and therefore the majority of U.S. Government securities purchased in 1999 were exempt from state income taxes. The average maturity of this sector of the portfolio increased to 3.8 years in 1999 from 2.4 years in 1998. Municipal Securities: The Company's municipal security holdings decreased $.9 million to $55.1 million at year-end from $56.0 million at year-end 1998. Due to their high yields, low credit risk, and pledgability for 22 public deposits, municipal securities remain attractive investments. All municipal securities held are rated "A" or better by one or more of the national rating services or are "non-rated" issues of local communities which, through the bank's own analysis, are deemed to be of satisfactory quality. The average contractual maturity of this portfolio increased to 5.9 years in 1999 from 4.8 years in 1998. Corporate and Other Securities: Holdings of corporate and other securities decreased $42.0 million to $11.4 million in 1999 from $53.4 million in 1998. The decrease was mainly from the maturity of very short-term corporate bonds purchased late in 1998. The portfolio consists primarily of equity securities held by the parent company, $5.7 million of Federal Home Loan Bank stock and $3.7 million of long-term corporate debt securities. 1998 The Company's investment portfolio decreased $4.4 million, or 1%, during 1998 to $297.7 million at year-end from $302.1 million at year-end 1997. The proceeds from the credit card portfolio sale in 1997 were primarily invested in short-term U.S. Government agency securities. The 1998 proceeds from security maturities, calls and paydowns were used to fund continued loan demand. The Company continued its strategy to minimize state income taxes by primarily investing in state income tax exempt U.S. Treasury and U.S.Government agency securities. Due to the yield advantages, U.S. Government agency securities were favored over their U.S. Treasury counterparts. The following table sets forth the book values of investment securities held on the dates indicated. Investments by Type (at carrying value)
December 31, -------------------------- 1999 1998 1997 -------- -------- -------- (Dollars in thousands) U.S. Treasury....................................... $ 57,285 $ 50,403 $ 70,614 U.S. Government agencies............................ 206,325 102,797 113,730 Agency mortgage-backed securities................... 15,931 19,683 29,770 Agency collateralized mortgage obligations.......... 2,536 15,310 24,154 State and municipal................................. 55,139 56,036 47,350 Corporate and other securities...................... 11,391 53,445 16,480 -------- -------- -------- Total investment portfolio.......................... $348,607 $297,674 $302,098 ======== ======== ========
At December 31, 1999 there are no investment securities of any one issuer in excess of 10% of shareholders' equity other than securities of the U.S. Government and its agencies. 23 The maturity distribution and weighted average yield of investment securities at December 31, 1999 are presented in the following table: Analysis of Investment Portfolio
State and U.S. Treasury U.S. Government Municipal Corporate and Securities Agencies/1/ Securities Other Securities ------------- ----------------- ---------------- -------------------- Amount Yield Amount Yield Amount Yield/2/ Amount Yield ------- ----- --------- ------- ------- -------- --------- ------- (Dollars in thousands) Maturities: Within 1 year.......... $13,088 5.94% $ 58,532 5.95% $ 4,671 5.62% $ -- -- 1-5 years.............. 44,197 5.29 89,638 5.95 19,045 6.28 -- -- 5-10 years............. -- -- 76,622 7.12 29,145 6.42 500 7.05 After 10 years......... -- -- -- -- 2,278 6.20 10,891/3/ 6.77 ------- ---- --------- ----- ------- ---- --------- ------ $57,285 5.44% $ 224,792 6.35% $55,139 6.29% $ 11,391 6.78% ======= ==== ========= ===== ======= ==== ========= ====== Average months to maturity............... 23 46 71 298
- -------- 1 Included in U.S. Government agencies are agency mortgage-backed securities (MBS) and agency collateralized mortgage obligations (CMOs). Given the amortizing nature of MBS and CMOs, the maturities presented in the table are based on their estimated average lives at December 31, 1999. The estimated average lives may differ from actual principal cash flows. Principal cash flows include prepayments and scheduled principal amortization. 2 Yields on state and municipal securities are calculated on a tax-equivalent basis using a tax rate of 34%. 3 Included in this amount are equity securities and Federal Home Loan Bank of Chicago stock, which have no maturity date and are not included in the average months to maturity. Loans 1999 At year-end 1999, loans outstanding, net of unearned discount, increased $88.0 million or 14% compared to 1998. Indirect auto loans, commercial real estate and home equity loans led the 1999 loan growth. Indirect automobile loans increased $50.0 million or 30% to $215.4 million in 1999 primarily due to competitive loan pricing and marketing efforts that added new dealers to the established network of metropolitan Chicago auto dealer relationships. The Company does not buy subprime auto paper. Commercial mortgage loans increased $43.6 million primarily due to competitive pricing and successful marketing efforts. Home equity loans increased $12.2 million or 17% to $85.3 million in 1999 primarily due to successful mass marketing efforts. Residential mortgage loans increased $2.8 million or 2%. This slight increase was the result of a strong mortgage market in the first half of 1999; however, due to rising interest rates, mortgage loan refinance activity slowed in the second half of 1999. In 1999, the Company originated approximately $65 million in new loans, of which $29 million were retained in the portfolio and $36 million were sold to investors. There were no loan concentrations exceeding 10% of total loans at December 31, 1999, which are not otherwise disclosed below. 24 1998 At year-end 1998, loans outstanding, net of unearned discount, increased $184.6 million or 41% compared to 1997. Indirect auto loans, commercial and commercial real estate loans led 1998 loan growth. In addition, the residential mortgage and home equity loan portfolios posted increases. Indirect automobile loans increased $59.5 million, or 56%, to $165.3 million in 1998. This increase is due to marketing initiatives and competitive loan pricing. The Company does not buy subprime auto paper. Commercial loans increased $54 million or 99% to $108.7 million in 1998 and commercial mortgage loans increased $41 million or 56% to $114.4 million. These increases were primarily due to additional marketing efforts and competitive pricing. Residential mortgage loans increased $20.7 million or 21% due to increased mortgage originations as a result of a declining interest rate environment and competitive pricing. In 1998, the Company originated approximately $106 million in new loans of which $53 million were retained in the portfolio and the other $53 million were sold to investors. There were no loan concentrations exceeding 10% of total loans at December 31, 1998, which were not otherwise disclosed below. Loans by Type
December 31, -------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (Dollars in thousands) Commercial loans.................. $107,557 $108,685 $ 54,658 $ 40,895 $ 38,171 Real estate loans-- Construction and land acquisition loans.............. 22,566 41,640 36,525 35,902 28,770 Commercial mortgage loans....... 158,008 114,373 73,376 63,394 55,437 Residential mortgage loans...... 120,191 117,438 96,766 93,730 81,226 Home equity loans............... 85,343 73,149 65,273 55,297 47,357 Indirect automobile loans/1..../.. 215,364 165,341 105,807 58,578 39,636 Consumer loans/2.............../.. 11,189 11,780 14,932 14,993 14,784 Credit card loans................. 85 213 631 58,114 58,592 -------- -------- -------- -------- -------- $720,303 $632,619 $447,968 $420,903 $363,973 Less: Unearned discount............... 334 632 636 739 1,245 Allowance for loan losses....... 4,828 4,445 4,329 4,109 3,932 -------- -------- -------- -------- -------- Loans, net...................... $715,141 $627,542 $443,003 $416,055 $358,796 -------- -------- -------- -------- --------
- -------- 1 Indirect automobile loans represent consumer auto loans made through a network of new car dealers. 2 Included in this amount are student loans, direct automobile loans and check credit loans. As evidenced by the previous table, loans secured by real estate comprise the greatest percentage of total loans. Most of the Company's residential real estate loans are secured by first mortgages and the home equity loans are secured primarily by junior liens on one-to-four family residences in the Chicago Metropolitan area. The Company generally limits total advances to a loan to value ratio of eighty-five percent or less. Commercial mortgages are generally secured by properties in the Chicago Metropolitan area. Average Loans Average loans for 1999 were $675.9 million, an increase of $154.9 million or 30% as compared to 1998. As shown in the following table, the increase is spread throughout the portfolio primarily in indirect auto loans 25 and commercial real estate loans. Average loans for 1998 increased to $521.1 million, an increase of $104.3 million or 25% over the 1997 average. Average Loans and Yield by Type
1999 1998 1997 -------------- -------------- -------------- Amount Yield Amount Yield Amount Yield -------- ----- -------- ----- -------- ----- (Dollars in thousands) Commercial loans.............. $106,594 7.69% $ 75,406 7.96% $ 46,247 8.50% Construction and land acquisition loans............ 32,349 8.68 33,922 9.15 35,560 9.59 Commercial mortgage loans..... 139,079 7.93 91,425 8.67 63,645 9.35 Residential mortgage loans.... 119,825 6.99 106,056 7.17 93,236 7.45 Home equity loans............. 77,986 7.47 68,547 7.97 59,882 8.20 Indirect auto loans........... 188,517 6.98 132,015 7.32 76,415 7.48 Consumer loans................ 11,436 7.37 13,332 8.39 14,597 8.29 Credit card loans............. 146 13.01 369 13.55 27,176 16.12 -------- ----- -------- ----- -------- ----- Total......................... $675,932 7.44% $521,072 7.86% $416,758 8.75% ======== ===== ======== ===== ======== =====
The following table indicates the maturity distribution of selected loans at December 31, 1999: Maturity Distribution of Selected Loans
One One to Over year or five five less/1/ years years Total ------- -------- -------- -------- (Dollars in thousands) Commercial loans........................... $53,863 $ 35,386 $ 18,308 $107,557 Real estate--construction and land acquisition loans......................... 19,487 3,079 -- 22,566 Commercial and residential mortgage loans.. 14,459 50,479 213,261 278,199 Home equity loans.......................... 4,104 73,110 8,129 85,343 ------- -------- -------- -------- $91,913 $162,054 $239,698 $493,665 ======= ======== ======== ========
- -------- 1 Includes demand loans. The following table indicates, for the loans in the Maturity Distribution table, the amounts due after one year which have fixed and variable interest rates at December 31, 1999:
Fixed Rate Variable Rate Total -------- ------------- -------- (Dollars in thousands) Commercial loans.............................. $ 47,394 $ 6,300 $ 53,694 Real estate--construction and land acquisition loans........................................ 791 2,288 3,079 Commercial and residential mortgage loans..... 183,126 80,614 263,740 Home equity loans............................. 25,925 55,314 81,239 -------- -------- -------- $257,236 $144,516 $401,752 ======== ======== ========
Variable rate loans are those on which the interest rate can be adjusted for changes in the Company's index rate (similar to prime rate), The Wall Street Journal's published prime rate, U.S. Treasury securities, LIBOR or the brokers' call money rate. Fixed rate loans are those on which the interest rate cannot be changed during the term of the loan. Deposits At year-end 1999, total deposits increased $116.3 million or 15%, compared to 1998. This increase was primarily due to a $100.9 million increase in time deposits, which was the result of successful retail deposit 26 promotions. In addition, through successful marketing, the Company increased noninterest-bearing demand deposits, primarily business accounts, by $9.0 million at year-end 1999. At December 31, 1999, there were no brokered deposits. Average deposits for 1999 increased $113.0 million or 16% as compared to 1998. The increase in average deposits is primarily due to a $84.3 million increase in time deposits, primarily from public funds and 1999 retail promotions, and a $19.3 million increase in noninterest-bearing demand deposits, primarily business accounts. Average deposits for 1998 increased $92.6 million or 15% as compared to 1997. The increase in average deposits is primarily due to a $69.1 million increase in time deposits, primarily from 1998 retail promotions and a $18.9 million increase in noninterest-bearing demand deposits, primarily business accounts. Average Deposits and Rate by Type
1999 1998 1997 ------------- ------------- ------------- Amount Rate Amount Rate Amount Rate -------- ---- -------- ---- -------- ---- (Dollars in thousands) Noninterest-bearing demand deposits........................ $189,448 -- % $170,146 -- % $151,257 -- % Savings deposits and NOW accounts........................ 172,452 2.76 171,067 3.34 172,533 3.57 Money market accounts............ 48,112 3.43 40,139 3.24 34,071 3.20 Time deposits.................... 431,150 5.43 346,807 5.77 277,727 5.81 -------- ---- -------- ---- -------- ---- Total............................ $841,162 3.55% $728,159 3.71% $635,588 3.68% ======== ==== ======== ==== ======== ====
As of December 31, 1999, the scheduled maturities of time deposits are as follows:
Maturity Distribution of Time Deposits (Dollars in thousands) 2000................................................................. $369,248 2001................................................................. 73,097 2002................................................................. 15,640 2003................................................................. 5,230 2004................................................................. 1,326 2005 and thereafter.................................................. 4,967 -------- Total................................................................ $469,508 ========
Borrowings Short-term borrowings, which include Federal funds purchased, securities sold under agreements to repurchase and Treasury, tax and loan demand notes, were $98.0 million at December 31, 1999, up $10.7 million from $87.3 million at the end of 1998. The 1999 increase was primarily due to an increase in Treasury tax and loan notes partially offset by a decrease in Federal funds purchased and an increase in securities sold under agreements to repurchase. In 1998, short-term borrowings increased to $87.3 million from $65.1 million in 1997, primarily due to an increase in Federal funds purchased partially offset by a decline in the Treasury tax and loan notes. As a member of the Federal Home Loan Bank, the Bank may obtain advances secured by certain of its residential mortgage loans and other assets. The Company continued to utilize the Federal Home Loan Bank advances due to the comparatively favorable terms available. Borrowings increased to $63.0 million at December 31, 1999 from $57.5 million at December 31, 1998, up 10%. In 1998 total FHLB borrowings increased 35% from $42.5 million at December 31, 1997. Borrowings mature from 2002 to 2008 and bear fixed interest rates ranging from 5.23% to 6.41%. At December 31, 1999 $20 million in FHLB borrowings are callable at the discretion of the FHLB of Chicago. See Item 8 under Note 6 to the consolidated financial statements for additional information. 27 Capital Resources One of the Company's primary objectives is to maintain strong capital to warrant the confidence of our customers, shareholders and bank regulatory agencies. A strong capital base is needed to take advantage of profitable growth opportunities that arise and to provide assurance to depositors and creditors. Banking is inherently a risk-taking activity requiring a sufficient level of capital to effectively and efficiently manage inherent business risks. The Company's capital objectives are to: . maintain sufficient capital to support the risk characteristics of the Company and the Company's subsidiary bank; and . maintain capital ratios which meet and exceed the "well-capitalized" regulatory capital ratio guidelines for the Company's subsidiary bank, thereby minimizing regulatory intervention and lowering FDIC assessments. At December 31, 1999, the Company's shareholders' equity climbed to $80.0 million. The Company's and its subsidiary bank's capital ratios not only exceeded minimum regulatory guidelines, but also the FDIC criteria for "well- capitalized" banks. As a result of loan growth, the risk weighted assets of the Bank have increased resulting in a slight decrease in the Company's capital ratios. The Company continues to analyze various sources of additional capital. See Item 8 under Note 9 to the financial statements for disclosures. In 1999, cash dividends declared totaled $2,596,000, a 14% increase from 1998. The Board declared an increased quarterly cash dividend in January 2000. The new quarterly dividend payable in April 2000, will be $.11 per common share. In 1998, cash dividends declared totaled $2,282,000, a 33% increase from 1997. The dividend payout ratio for 1999 was 24.62% as compared to 24.17% in 1998. On January 27, 1998, the Company's Board of Directors authorized a stock repurchase program. The program allowed the Company to repurchase up to 200,000 shares, of its Common Stock through mid-1999. This program was extended through December 31, 2000. In 1999, 105,500 shares of Common Stock were repurchased at a cost of $1,982,000. In 1998 approximately 86,000 shares were repurchased under this plan. This plan was completed in February 2000. On January 25, 2000, the Board of Directors authorized another stock repurchase program. The program allows the Company to repurchase up to an additional 200,000 shares of its Common Stock through mid-2001. Repurchases can be made in the open market or through negotiated transactions from time to time depending on market conditions. The stock, if repurchased, will be held as treasury stock to be used for general corporate purposes. Year 2000 Compliance During 1999, management completed its process of preparing for the Year 2000 date change. This process included a plan to identify potential problems with the Company's mainframe computer, its companywide PC-based network, as well as any other operational issues that may have been hindered by system failures due to the Year 2000 bug. It also included testing and implementation of internal software, links with third party vendors in the normal course of business, as well as the development of a contingency plan to address the potential risks in the event of Year 2000 failures. To date, the Company has successfully managed the Year 2000 transition and there have been no problems with significant vendors or borrowers. Although the Company feels that the Year 2000 problem is solved, unexpected problems in the internal processes within the Company, as well as third party non-compliance and disruptions to the economy in general could still occur despite the Company's efforts to date. Management continues to monitor all of its business processes, and plans to address any issues that may arise to ensure that its core banking systems remain operating properly. The Company estimates its cost for Year 2000 compliance was approximately $178,000, a majority of which was expended in 1999. It expects any continued costs to address any problems that may arise in 2000 to be immaterial. 28 Impact of New Accounting Standards In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires all derivatives to be recognized as either assets or liabilities in the statement of financial condition and to be measured at fair value. As issued, the Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB No. 133." The Statement is effective upon issuance and it amends SFAS No. 133 to be effective for all fiscal quarters of fiscal years beginning after June 30, 2000. The Company does not believe this statement will have a material impact on its financial position or results of operations. Forward Looking Statements This Form 10-K Annual Report contains certain forward looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors which could cause actual results to differ from these estimates. These factors include, but are not limited to, changes in: general economic condition, interest rates, legislative or regulatory changes, loan demand, depositor preferences and the ability to attract and retain experienced senior management. Therefore, there can be no assurances that future actual results will correspond to these forward-looking statements. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risks See "Interest Rate Sensitivity" in Item 7 of this document. 29 ITEM 8. Financial Statements and Supplementary Data CONSOLIDATED BALANCE SHEETS
December 31, ---------------------- 1999 1998 ---------- ---------- (Dollars in thousands) Assets Cash and due from banks................................ $ 47,080 $ 41,759 Federal funds sold..................................... -- 362 Interest-bearing deposits with banks................... 488 11,402 Investment securities: Securities held-to-maturity, at amortized cost (fair value of $93,202 and $143,980 in 1999 and 1998, respectively)....................................... 94,425 141,253 Securities available-for-sale, at fair value......... 254,182 156,421 Loans, net of unearned discount........................ 719,969 631,987 Less-allowance for loan losses......................... (4,828) (4,445) ---------- ---------- Net loans............................................ 715,141 627,542 Premises and equipment, net............................ 21,809 21,032 Other assets........................................... 13,231 9,504 ---------- ---------- Total Assets........................................... $1,146,356 $1,009,275 ========== ========== Liabilities and Shareholders' Equity Noninterest-bearing demand deposits.................... $ 196,243 $ 187,209 Interest-bearing deposits: Savings deposits and NOW accounts.................... 171,135 177,572 Money market accounts................................ 57,186 44,375 Time deposits Under $100,000..................................... 236,108 181,924 $100,000 and over.................................. 233,400 186,722 ---------- ---------- Total interest-bearing deposits........................ 697,829 590,593 ---------- ---------- Total deposits......................................... 894,072 777,802 Federal funds purchased and securities sold under agreements to repurchase.............................. 78,008 83,586 Treasury, tax and loan demand notes.................... 20,000 3,682 Federal Home Loan Bank borrowings...................... 63,000 57,500 Other liabilities...................................... 11,277 9,644 ---------- ---------- Total Liabilities...................................... 1,066,357 932,214
Shareholders' Equity: Preferred stock, series B, no par value, authorized-- 100,000 shares, issued--none.......................... -- -- Class A common stock, $2 par value, authorized-- 10,000,000 shares, issued--4,019,902 shares, outstanding--3,666,902 shares in 1998................. -- 8,040 Common Stock, $2 par value, authorized--16,000,000 shares in 1999 and 6,000,000 shares in 1998, issued-- 7,283,256 shares in 1999 and 3,263,354 shares in 1998, outstanding--6,531,314 shares in 1999 and 2,915,938 shares in 1998........................................ 14,567 6,527 Surplus................................................ 11,985 11,955 Accumulated other comprehensive income (loss).......... (1,245) 2,263 Retained earnings...................................... 62,356 54,406 Less cost of shares in treasury, 751,942 common shares in 1999, and 353,000 Class A common and 347,416 common shares in 1998........................................ (7,664) ( 6,130) ---------- ---------- Total Shareholders' Equity............................. 79,999 77,061 ---------- ---------- Total Liabilities and Shareholders' Equity............. $1,146,356 $1,009,275 ========== ==========
See accompanying notes to consolidated financial statements. 30 CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, ----------------------- 1999 1998 1997 ------- ------- ------- (Dollars in thousands except per share amounts) Interest income: Interest and fees on loans........................... $50,078 $40,811 $36,305 Interest on securities: U.S. Treasury and Government agencies............... 14,208 14,127 14,412 Obligations of states and political subdivisions.... 2,825 2,574 2,517 Other securities.................................... 830 1,314 631 Interest on Federal funds sold and securities purchased under agreements to resell................ 1,118 2,106 460 Interest on deposits with banks...................... 401 764 362 ------- ------- ------- Total interest income................................. 69,460 61,696 54,687 Interest expense: Interest on savings deposits and NOW accounts........ 4,765 5,711 6,159 Interest on money market accounts.................... 1,648 1,302 1,089 Interest on time deposits............................ 23,428 20,016 16,125 Interest on Federal funds purchased and securities sold under agreements to repurchase................. 3,042 2,491 2,612 Interest on Treasury, tax and loan demand notes...... 370 523 489 Interest on Federal Home Loan Bank borrowings........ 3,870 3,243 781 ------- ------- ------- Total interest expense................................ 37,123 33,286 27,255 ------- ------- ------- Net interest income................................... 32,337 28,410 27,432 Provision for loan losses............................. 840 630 1,550 ------- ------- ------- Net interest income after provision for loan losses... 31,497 27,780 25,882 ------- ------- ------- Other income: Service charges on deposit accounts.................. 3,600 3,190 2,730 Investment management and trust fees................. 1,128 1,048 1,025 Merchant card processing fees........................ 1,858 1,329 964 Fees on mortgages sold............................... 422 416 224 Income from revenue sharing agreement................ 900 900 450 Other operating income............................... 979 1,029 906 Investment securities gains (losses), net............ 79 79 (9) Gain on sale of credit card portfolio................ -- -- 9,251 ------- ------- ------- Total other income.................................... 8,966 7,991 15,541 ------- ------- ------- Other expenses: Salaries and employee benefits....................... 15,817 13,680 12,293 Occupancy expense.................................... 1,683 1,566 1,457 Equipment expense.................................... 1,824 1,906 1,566 Data processing...................................... 968 776 1,301 Postage, stationery and supplies..................... 865 834 768 Advertising and business development................. 1,231 1,090 1,191 Merchant interchange expense......................... 1,419 994 697 Other operating expenses............................. 1,833 1,577 1,435 ------- ------- ------- Total other expenses.................................. 25,640 22,423 20,708 ------- ------- ------- Income before income taxes............................ 14,823 13,348 20,715 Income tax expense.................................... 4,277 3,907 6,962 ------- ------- ------- Net income............................................ $10,546 $ 9,441 $13,753 ======= ======= ======= Basic earnings per share.............................. $ 1.60 $ 1.42 $ 2.09 ======= ======= ======= Diluted earnings per share............................ $ 1.57 $ 1.39 $ 2.03 ======= ======= =======
See accompanying notes to consolidated financial statements. 31 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Class A Common Stock Common Stock Accumulated ------------------- ------------------ Other Total Par Par Comprehensive Retained Treasury Shareholders' Shares Value Shares Value Surplus Income (loss) Earnings Stock Equity ---------- ------- --------- ------- ------- -------------- -------- -------- ------------- (Dollars in thousands except share amounts) Balance at December 31, 1996................... 3,708,964 $ 7,418 3,382,276 $ 6,765 $10,472 $ 273 $35,395 $ (770) $59,553 ---------- ------- --------- ------- ------- ------- ------- ------- ------- Comprehensive income, net of tax Net income............. 13,753 13,753 Unrealized holding gain during the period of $1,365, net of reclassification adjustment for realized loss included in net income of $6... 1,371 1,371 ------- Total comprehensive income................. 15,124 Conversion of common stock into Class A common stock........... 269,548 540 (269,548) (540) Dividends declared...... (1,711) (1,711) Exercise of stock options (including tax benefit)............... (5,698) (12) 185,064 371 1,330 (179) 1,510 Purchase of treasury stock (2,992 shares of common and 236,000 shares of Class A common)................ (2,815) (2,815) ---------- ------- --------- ------- ------- ------- ------- ------- ------- Balance at December 31, 1997................... 3,972,814 $ 7,946 3,297,792 $ 6,596 $11,802 $ 1,644 $47,258 $(3,585) $71,661 ---------- ------- --------- ------- ------- ------- ------- ------- ------- Comprehensive income, net of tax Net income............. 9,441 9,441 Unrealized holding gain during the period of $681, net of reclassification adjustment for realized gain included in net income of $52.. 619 619 ------- Total comprehensive income................. 10,060 Conversion of common stock into Class A common stock........... 47,088 94 (47,088) (94) Dividends declared...... (2,282) (2,282) Exercise of stock options (including tax benefit)............... 12,650 25 153 (11) 1 168 Purchase of treasury stock (117,000 shares of Class A common)..... (2,546) (2,546) ---------- ------- --------- ------- ------- ------- ------- ------- ------- Balance at December 31, 1998................... 4,019,902 $ 8,040 3,263,354 $ 6,527 $11,955 $ 2,263 $54,406 $(6,130) $77,061 ---------- ------- --------- ------- ------- ------- ------- ------- ------- Comprehensive income, net of tax Net income............. 10,546 10,546 Unrealized holding loss during the period of $3,560, net of reclassification adjustment for realized gain included in net income of $52.. (3,508) (3,508) ------- Total comprehensive income................. 7,038 Reclassification of common stock into Class A common stock and renamed Common Stock... (4,019,902) (8,040) 4,019,902 8,040 Dividends declared...... (2,596) (2,596) Exercise of stock options (including tax benefit)............... 30 448 478 Purchase of treasury stock (105,500 common shares)................ (1,982) (1,982) ---------- ------- --------- ------- ------- ------- ------- ------- ------- Balance at December 31, 1999................... -- $ -- 7,283,256 $14,567 $11,985 $(1,245) $62,356 $(7,664) $79,999 ========== ======= ========= ======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements. 32 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------ 1999 1998 1997 --------- --------- -------- (Dollars in thousands) Cash flows from operating activities: Net income.................................... $ 10,546 $ 9,441 $ 13,753 Adjustments to reconcile net income to net cash provided by operating activities: Gain on credit card portfolio sale............ -- -- (9,251) Depreciation and amortization................. 2,024 2,056 1,762 Discount accretion............................ (875) (1,398) (839) Premium amortization.......................... 1,274 1,255 1,500 Provision for loan losses..................... 840 630 1,550 Deferred taxes................................ (244) (1,039) 233 Investment securities (gains) losses.......... (79) (79) 9 Revenue sharing agreement..................... 917 919 543 Origination of real estate loans for sale..... (36,197) (55,469) (28,230) Proceeds from sale of real estate loans originated for sale.......................... 39,333 52,508 28,534 Increase in other assets...................... (5,033) (2,240) (1,803) Increase in other liabilities................. 3,684 1,260 2,553 Amortization of intangible assets............. -- 42 43 --------- --------- -------- Net cash provided by operating activities...... 16,190 7,886 10,357 Cash flows from investing activities: Interest-bearing deposits with banks: Purchases..................................... -- -- (10,177) Proceeds from maturities 11,480 -- -- Securities held-to-maturity: Purchases..................................... (22,737) (66,156) (80,742) Proceeds from maturities, calls and paydowns.. 65,788 68,121 32,382 Securities available-for-sale: Purchases..................................... (303,996) (151,125) (85,931) Proceeds from maturities, calls and paydowns.. 76,939 48,327 47,549 Proceeds from sales........................... 127,438 106,417 52,005 Proceeds from credit card portfolio sale...... -- -- 64,000 Increase in loans............................. (91,575) (182,208) (83,552) Purchases of premises and equipment........... (2,801) (4,315) (3,065) --------- --------- -------- Net cash used in investing activities.......... (139,464) (180,939) (67,531) Cash flows from financing activities: Increase in noninterest bearing demand deposits..................................... 9,034 33,403 6,309 Increase (decrease) in interest-bearing deposit accounts............................. 107,236 116,636 (26,849) Increase (decrease) in Federal funds purchased and securities sold under agreements to repurchase................................... (5,578) 30,978 9,403 Increase (decrease) in Treasury, tax and loan demand notes................................. 16,318 (8,826) 526 Proceeds from Federal Home Loan Bank borrowings................................... 10,500 42,500 42,500 Repayment of Federal Home Loan Bank borrowings................................... (5,000) (27,500) -- Purchase of treasury stock.................... (1,982) (2,546) (2,815) Exercise of stock options..................... 478 168 1,510 Cash dividends................................ (2,596) (2,282) (1,711) --------- --------- -------- Net cash provided by financing activities...... 128,410 182,531 28,873 --------- --------- -------- Net increase (decrease) in cash and cash equivalents................................... 5,136 9,478 (28,301) Cash and cash equivalents at beginning of year.......................................... 42,432 32,954 61,255 --------- --------- -------- Cash and cash equivalents at end of year....... $ 47,568 $ 42,432 $ 32,954 ========= ========= ======== Supplemental disclosures: Interest paid................................. $ 41,200 $ 32,697 $ 27,195 Income taxes paid............................. 4,672 3,204 5,795
See accompanying notes to consolidated financial statements. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies The consolidated financial statements include the accounts of First Oak Brook Bancshares, Inc. (the Company) and its wholly-owned subsidiary, Oak Brook Bank. All intercompany accounts and transactions have been eliminated. The accounting and reporting policies of the Company and its subsidiary conform to generally accepted accounting principles and to general practice within the banking industry. The Company, through its subsidiary bank, operates in a single segment engaging in general retail and commercial banking business, primarily in the Chicago Metropolitan area. The services offered include demand, savings and time deposits, corporate cash management services, commercial lending products such as commercial loans, mortgages and letters of credit, and personal lending products such as residential mortgages, home equity lines and auto loans. The subsidiary bank has a full service investment management and trust department. Use of Estimates: The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Investment Securities: Securities are classified as held-to-maturity, available-for-sale or trading at the time of purchase. Securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. All other securities are classified as available- for-sale and stated at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity. The Company does not carry any securities for trading purposes. The amortized cost of securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums to the earlier of maturity or call date, and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. The cost of securities sold is based on the specific identification method. Loan Fees and Related Costs: Loan origination and commitment fees and certain direct loan origination costs are deferred and amortized as an adjustment of the related loan's yield over the contractual life of the loan using the level-yield method. Allowance for Loan Losses: The allowance for loan losses is maintained at a level believed adequate by management to absorb estimated probable loan losses. Management's periodic evaluation of the adequacy of the allowance is based on the Company's past loan loss experience, peer loan loss experience, known and inherent risks in the portfolio, composition of the loan portfolio, current economic conditions, and other relevant factors. Loans which are determined to be uncollectible are charged off against the allowance for loan losses and recoveries of loans that were previously charged off are credited to the allowance. The Company's charge-off policy varies with respect to the category of and specific circumstances surrounding each loan under consideration. The Company records charge-offs on the basis of management's ongoing evaluation of collectibility. In addition, any loans which are classified as "loss" in regulatory examinations are charged off. The Company records specific valuation allowances on commercial, commercial mortgage and construction loans when a loan is considered to be impaired. A loan is impaired when, based on an evaluation of current information and events, it is probable that the Company will not be able to collect all amounts due (principal and 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) interest) pursuant to the original contractual terms. The Company measures impairment based upon the present value of expected future cash flows discounted at the loan's original effective interest rate or the fair value of the collateral if the loan is collateral dependent. Large groups of homogeneous loans, such as residential mortgage, home equity, indirect auto and consumer loans, are collectively evaluated for impairment. Interest income on impaired loans is recognized using either the cash basis method or a cost recovery method depending upon the circumstances. Commercial, real estate, commercial mortgage and construction loans are placed on nonaccrual status when the collectibility of the contractual principal or interest is deemed doubtful by management or when the loan becomes 90 days or more past due and is not well secured or in the process of collection. Premises and Equipment: Premises, leasehold improvements and equipment are stated at cost less accumulated depreciation and amortization. For financial reporting purposes, depreciation is charged to expense by the straight-line method over the estimated useful life of the asset. Leasehold improvements are amortized over a period not exceeding the term of the lease, including renewal option periods. Income Taxes: The Company and its subsidiary file consolidated income tax returns. The subsidiary provides for income taxes on a separate return basis and remits to the Company amounts determined to be currently payable. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Earnings Per Share: Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income by the weighted average number of common shares adjusted for the dilutive effect of outstanding stock options. Stock Options: The Company accounts for stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Comprehensive Income: Comprehensive income consists of net income and net unrealized gains (losses) on available-for-sale securities and is presented in the Consolidated Statements of Changes in Shareholders' Equity. Cash and Cash Equivalents: For purposes of the Consolidated Statements of Cash Flows, cash and cash equivalents include cash and due from banks, Federal funds sold, and interest bearing deposits with banks with original maturities of 90 days or less. Reclassifications: Certain amounts in the 1998 and 1997 consolidated financial statements have been reclassified to conform to their 1999 presentation and restated to give effect to the 100% stock dividend declared on July 21, 1998. Note 2. Cash and Due From Banks Cash and due from banks include reserve balances that the Company's subsidiary bank is required to maintain with the Federal Reserve Bank of Chicago. These required reserves are based principally on deposits outstanding. The average reserves required at December 31, 1999 and 1998 were $4,277,000 and $3,118,000, respectively. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 3. Investment Securities The aggregate amortized cost and fair value of securities, and gross unrealized gains and losses at December 31 follow:
Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- (Dollars in thousands) 1999 Securities available-for-sale: U.S. Treasury....................... $ 45,545 $ 21 $ (634) $ 44,932 U.S. Government agencies............ 167,582 406 (1,625) 166,363 Agency mortgage-backed securities... 9,594 11 (119) 9,486 Agency collateralized mortgage obligations........................ 1,617 3 (8) 1,612 Obligations of states and political subdivisions....................... 20,748 321 (171) 20,898 Corporate and other securities...... 10,986 179 (274) 10,891 -------- ------ ------- -------- Total securities available-for- sale............................... $256,072 $ 941 $(2,831) $254,182 ======== ====== ======= ======== Securities held-to-maturity: U.S. Treasury....................... $ 12,353 $ 2 $ (222) $ 12,133 U.S. Government agencies............ 39,962 11 (542) 39,431 Agency mortgage-backed securities... 6,445 10 (107) 6,348 Agency collateralized mortgage obligations........................ 924 -- -- 924 Obligations of states and political subdivisions....................... 34,241 243 (630) 33,854 Corporate and other securities...... 500 12 -- 512 -------- ------ ------- -------- Total securities held-to-maturity... $ 94,425 $ 278 $(1,501) $ 93,202 ======== ====== ======= ======== 1998 Securities available-for-sale: U.S. Treasury....................... $ 34,329 $ 466 $ -- $ 34,795 U.S. Government agencies............ 60,986 1,892 -- 62,878 Agency mortgage-backed securities... 12,871 85 (83) 12,873 Agency collateralized mortgage obligations........................ 9,481 66 (3) 9,544 Obligations of states and political subdivisions....................... 19,728 983 (1) 20,710 Corporate and other securities...... 15,570 51 -- 15,621 -------- ------ ------- -------- Total securities available-for- sale............................... $152,965 $3,543 $ (87) $156,421 ======== ====== ======= ======== Securities held-to-maturity: U.S. Treasury....................... $ 15,608 $ 175 $ -- $ 15,783 U.S. Government agencies............ 39,919 1,160 -- 41,079 Agency mortgage-backed securities... 6,810 115 (1) 6,924 Agency collateralized mortgage obligations........................ 5,766 28 (6) 5,788 Obligations of states and political subdivisions....................... 35,326 1,149 (80) 36,395 Corporate and other securities...... 37,824 187 -- 38,011 -------- ------ ------- -------- Total securities held-to-maturity... $141,253 $2,814 $ (87) $143,980 ======== ====== ======= ========
36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The amortized cost and fair value of investment securities at December 31, 1999, by contractual maturity, are shown below. Agency mortgage-backed securities and collateralized mortgage obligations are presented in the table based on their estimated average lives, which will differ from contractual maturities due to principal prepayments. Other securities include preferred stock, equity securities and Federal Home Loan Bank of Chicago stock, which have no stated maturity date.
Amortized Fair Cost Value --------- -------- (Dollars in thousands) Securities available-for-sale: Due in one year or less................................ $ 49,253 $ 49,084 Due after one year through five years.................. 121,052 119,498 Due after five years through ten years................. 74,246 74,162 Over ten years......................................... 4,484 4,294 Other securities....................................... 7,037 7,144 -------- -------- $256,072 $254,182 ======== ======== Securities held-to-maturity: Due in one year or less................................ $ 27,207 $ 27,128 Due after one year through five years.................. 33,382 33,156 Due after five years through ten years................. 32,105 31,305 Over ten years......................................... 1,731 1,613 -------- -------- $ 94,425 $ 93,202 ======== ========
At December 31, 1999, investment securities with a book value of $322,903,000 were pledged as collateral to secure certain deposits and for other purposes as required by law. Proceeds from sales of available-for-sale investments in debt and equity securities during 1999, 1998 and 1997 were $127,438,000, $106,417,000 and $52,005,000, respectively. Gross gains of $101,000 and gross losses of $22,000 were realized on those sales in 1999. Gross gains of $81,000 and gross losses of $2,000 were realized on those sales in 1998. Gross gains of $194,000 and gross losses of $203,000 were realized on those sales in 1997. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 4. Loans Loans outstanding at December 31 follow:
1999 1998 -------- -------- (Dollars in thousands) Commercial............................................... $107,557 $108,685 Real estate loans-- Construction and land acquisition...................... 22,566 41,640 Commercial mortgage.................................... 158,008 114,373 Residential mortgage................................... 120,191 117,438 Home equity loans...................................... 85,343 73,149 Indirect automobile loans................................ 215,364 165,341 Consumer loans........................................... 11,274 11,993 -------- -------- Total loans............................................ 720,303 632,619 Less unearned discount................................. (334) (632) -------- -------- Loans, net of unearned discount........................ $719,969 $631,987 ======== ========
The Company originates real estate, commercial and consumer loans primarily within the Chicago Metropolitan area. Generally, real estate and consumer loans are secured by various items of property such as first and second mortgages, automobiles and cash collateral. Substantially all of the commercial portfolio is secured by business assets. The Company's indirect auto portfolio is generated from a network of metropolitan Chicago auto dealer relationships. The Company utilizes credit underwriting standards that management believes result in a high quality new and used auto loan portfolio. Management continually monitors the dealer relationships to ensure the Company is not dependent on any one dealer as a source of such loans. The Company does not originate any sub-prime loans. Loans secured by residential real estate are expected to be paid by the borrowers' cash flows or proceeds from the sale or refinancing of the underlying real estate. Such loans are primarily secured by real estate within the Chicago Metropolitan area. Performance of these loans may be affected by conditions influencing the local economy and real estate market. However, the Company's loan policy generally requires that the loan to value ratio should not exceed eighty percent of the appraised value of the real estate and eighty five percent of the appraised value for home equity loans. In the normal course of business, there are various outstanding commitments and contingent liabilities, including commitments to extend credit, that are not reflected in the financial statements. The Company's exposure to credit loss in the event of nonperformance by the other party to the commitments and lines of credit is limited to their contractual amount. Many commitments to extend credit expire without being used. Therefore, the amounts stated below do not necessarily represent future cash commitments. These commitments (including letters of credit) and credit lines are subject to the same credit policies followed for loans recorded in the financial statements. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A summary of these commitments to extend credit at December 31 follows:
1999 1998 -------- -------- (Dollars in thousands) Commercial................................................ $ 59,984 $ 64,364 Commercial mortgage....................................... 24,389 39,973 Home equity............................................... 110,699 94,500 Check credit.............................................. 834 872 -------- -------- Total commitments to extend credit........................ $195,906 $199,709 ======== ========
An analysis of the allowance for loan losses follows:
1999 1998 1997 ------ ------ ------ (Dollars in thousands) Balance at beginning of year......................... $4,445 $4,329 $4,109 Provision for loan losses............................ 840 630 1,550 Recoveries........................................... 71 215 175 Charge-offs.......................................... (528) (729) (1,505) ------ ------ ------ Balance at end of year............................... $4,828 $4,445 $4,329 ====== ====== ======
The Company had $90,000 of nonaccrual loans at December 31, 1999. Included in the nonaccrual loan total at December 31, 1999 is a $40,000 impaired loan which does not have a specific valuation allowance. The Company had no nonaccrual loans or impaired loans, as defined, at December 31, 1998. The average balance of impaired loans was $134,000 and $835,000 for 1999 and 1997, respectively. There were no impaired loans during 1998. The Company did not recognize any interest income associated with impaired loans during 1999, 1998 or 1997. If interest had been accrued at its original rate, such income would have approximated $15,000 in 1999 and $52,000 in 1997. Note 5. Premises and Equipment A summary of premises and equipment at December 31 follows:
1999 1998 -------- -------- (Dollars in thousands) Land................................................... $ 4,283 $ 3,552 Buildings and improvements............................. 18,949 17,420 Construction in progress............................... -- 724 Leasehold improvements................................. 999 997 Data processing equipment, office equipment and furniture............................................. 14,176 13,073 -------- -------- 38,407 35,766 Less accumulated depreciation and amortization......... (16,598) (14,734) -------- -------- Premises and equipment, net............................ $ 21,809 $ 21,032 ======== ========
39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company has entered into a number of noncancellable operating lease agreements for certain of its subsidiary bank's office premises. The minimum annual net rental commitments under these leases, which do not extend beyond 2003, are as follows:
(Dollars in thousands) 2000.............................................................. $190 2001.............................................................. 135 2002.............................................................. 73 2003.............................................................. 8 ---- $406 ====
Total rental expense for 1999, 1998, and 1997 was approximately $197,000, $194,000, and $194,000 respectively, which included payment of certain occupancy expenses as defined in the lease agreements. The Company's aggregate future minimum net rentals to be received under noncancellable leases from third party tenants which expire in 2002 are as follows:
(Dollars in thousands) 2000.............................................................. $371 2001.............................................................. 340 2002.............................................................. 1 ---- $712 ====
The Company also receives reimbursement from its tenants for certain occupancy expenses including taxes, insurance and operational expenses, as defined in the lease agreements. Note 6. Borrowings The Company's borrowings at December 31, 1999 and 1998 consisted of Federal funds purchased, securities sold under repurchase agreements (repos), Treasury, tax and loan notes and Federal Home Loan Bank borrowings. The Federal funds purchased generally represent one day borrowings obtained from correspondent banks. The repos represent borrowings which have maturities within one year and are secured by U.S. Treasury and agency securities. Federal funds purchased, repos and Treasury, tax and loan demand notes:
1999 1998 1997 ------- ------- ------- (Dollars in thousands) At December 31....................................... $98,008 $87,268 $65,116 Average during the year.............................. 71,828 59,110 59,881 Maximum month-end balance............................ 98,150 87,268 76,158 Average rate at year-end............................. 4.93% 5.09% 5.79% Average rate during the year......................... 4.75% 5.10% 5.18%
40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Federal Home Loan Bank fixed rate borrowings at December 31:
1999 1998 ------------ ------------ Maturity Amount Rate Amount Rate - -------- ------- ---- ------- ---- (Dollars in thousands) February 22, 2000................................... $ -- -- % $ 5,000 5.48% June 18, 2002....................................... 5,000 5.71 5,000 5.71 September 25, 2002.................................. 5,000 6.41 5,000 6.41 February 5, 2003.................................... 1,000 5.59 -- -- February 19, 2003................................... 10,000 5.84 10,000 5.84 November 20, 2003................................... 1,500 5.43 1,500 5.43 January 7, 2004..................................... 6,000 5.49 -- -- February 7, 2005.................................... 1,500 5.74 -- -- February 19, 2005................................... 10,000 5.97 10,000 5.97 February 5, 2007.................................... 2,000 5.83 -- -- January 12, 2008.................................... 15,000 5.23 15,000 5.23 February 19, 2008................................... 6,000 6.04 6,000 6.04 ------- ---- ------- ---- Total/Average rate.................................. $63,000 5.72% $57,500 5.72% ======= =======
The borrowings due on February 22, 2000 were called on November 22, 1999. The borrowings due on June 18, 2002 and January 12, 2008 are callable in whole or in part on March 18, 2000 and January 12, 2003, respectively. The Company has adopted a collateral pledge agreement whereby the Company has agreed to keep on hand, at all times, free of all other pledges, liens, and encumbrances, first mortgage residential loans with unpaid principal balances aggregating no less than 167% of the outstanding borrowings from the Federal Home Loan Bank of Chicago (FHLB). The Company specifically assigned certain loans to the FHLB which increases the Company's borrowing capacity. All stock in the FHLB, totaling $5,719,000 and $4,836,000 at December 31, 1999 and 1998, respectively, is pledged as additional collateral for these borrowings. At December 31, 1999, the Company has a revolving credit arrangement with a third party unaffiliated bank for $15 million which matures on April 1, 2000. The line was unused during 1999 and 1998. Note 7. Income Taxes The components of income tax expense for the years ended December 31 follow:
1999 1998 1997 ------ ------ ------ (Dollars in thousands) Current.............................................. $4,521 $4,946 $6,729 Deferred provision (benefit)......................... (244) (1,039) 233 ------ ------ ------ Total income tax expense............................. $4,277 $3,907 $6,962 ====== ====== ======
41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The net deferred tax assets (liabilities) at December 31 consisted of the following:
1999 1998 ------ ------ (Dollars in thousands) Gross deferred tax liabilities: Unrealized gains on securities available-for-sale........... $ -- $1,193 Accretion of discount on securities......................... 174 206 Depreciation................................................ 740 713 Book over tax basis of land................................. 205 205 Deferred loan costs......................................... 456 371 Other, net.................................................. 141 252 ------ ------ Total deferred tax liabilities............................ 1,716 2,940 Gross deferred tax assets: Unrealized loss on securities available-for-sale............ 641 -- Book over tax loan loss reserve............................. 1,915 1,763 Revenue sharing agreement................................... 682 920 Retirement plan............................................. 314 246 Deferred expenses........................................... 496 265 ------ ------ Total deferred tax assets................................. 4,048 3,194 ------ ------ Net deferred tax assets................................... $2,332 $ 254 ====== ======
No valuation allowance related to deferred tax assets has been recorded at December 31, 1999 and 1998 as management believes it is more likely than not that the deferred tax assets will be fully realized. The effective tax rates for 1999, 1998 and 1997 were 28.9%, 29.3% and 33.6%, respectively. Income tax expense was less than the amount computed by applying the Federal statutory rate of 35% due to the following:
1999 1998 1997 ------ ------ ------ (Dollars in thousands) Tax expense at statutory rate....................... $5,188 $4,672 $7,250 Increase (decrease) in taxes resulting from: Income from obligations of states and political subdivisions and certain loans not subject to Federal income taxes............................. (956) (872) (870) State income taxes................................ 166 147 430 Other, net........................................ (121) (40) 152 ------ ------ ------ Total income tax expense............................ $4,277 $3,907 $6,962 ====== ====== ======
Note 8. Shareholders' Equity On May 4, 1999, the Shareholders of the Company approved the reclassification of the Common stock into Class A common stock on a one-for- one basis, having one vote per share. As a result of the reclassification, the Class A common stock is now the only class of outstanding common stock of the Company and has been renamed "Common Stock". The presentation of shareholders' equity on the consolidated balance sheet at December 31, 1999 reflects the reclassification of the Common Stock. The amounts as of December 31, 1998 have not been reclassified. On May 4, 1999, the Company's Board of Directors adopted a shareholder rights plan by providing for a dividend distribution of one preferred share purchase right for each share of the Company's Common Stock held of record on May 21, 1999. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At December 31, 1999, the Company has reserved for issuance 603,550 shares of Common Stock for the Stock Option Plan. Payment of dividends by the Company's subsidiary bank is subject to both Federal and state banking laws and regulations that limit the amount of dividends that can be paid by the bank without prior regulatory approval. At December 31, 1999, $25,884,000 of undistributed earnings was available for the payment of dividends by the subsidiary bank without prior regulatory approval. On July 21, 1998, the Board declared a 100% stock dividend on Common and Class A common stock which was distributed on September 3, 1998 to shareholders of record on August 20, 1998. All share and per share amounts for each period presented have been restated to reflect the stock split effected in the form of a dividend. Note 9. Regulatory Capital The Company and its bank subsidiary are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its bank subsidiary must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Regulations require the Company and its bank subsidiary to maintain minimum amounts of total and Tier 1 capital, minimum ratios of total and Tier 1 capital to risk-weighted assets, and a minimum ratio of Tier 1 capital to average assets to ensure capital adequacy. Management believes, as of December 31, 1999 and 1998, that the Company and its bank subsidiary meet all capital adequacy requirements to which they are subject. The Company and its bank subsidiary's actual capital amounts and ratios are presented in the following table. As of December 31, 1999 and 1998, the most recent regulatory notification categorized the bank subsidiary as well capitalized. At December 31, 1999, there are no conditions or events since that notification that management believes have changed the institution's category. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Capital Required To Be --------------------------- Adequately Well Actual Capitalized Capitalized ------------- ------------- ------------- Amount Ratio Amount Ratio Amount Ratio ------- ----- ------- ----- ------- ----- (Dollars in thousands) As of December 31, 1999: Total Capital (to Risk Weighted Assets) Consolidated..................... $86,081 10.65% $64,685 8% $80,856 10% Oak Brook Bank................... 86,432 10.72 64,531 8 80,664 10 Tier 1 Capital (to Risk Weighted Assets) Consolidated..................... $81,244 10.05% $32,342 4% $48,514 6% Oak Brook Bank................... 81,604 10.12 32,266 4 48,399 6 Tier 1 Capital (to Average Assets) Consolidated..................... $81,244 7.12% $46,122 4% $57,652 5% Oak Brook Bank................... 81,604 7.16 46,044 4 57,555 5 As of December 31, 1998: Total Capital (to Risk Weighted Assets) Consolidated..................... $79,242 10.80% $58,678 8% $73,349 10% Oak Brook Bank................... 74,724 10.20 58,600 8 73,249 10 Tier 1 Capital (to Risk Weighted Assets) Consolidated..................... $74,798 10.20% $29,339 4% $44,009 6% Oak Brook Bank................... 70,279 9.59 29,300 4 43,950 6 Tier 1 Capital (to Average Assets) Consolidated..................... $74,798 7.61% $39,290 4% $49,113 5% Oak Brook Bank................... 70,279 7.16 39,247 4 49,059 5
Note 10. Earnings Per Share The following table sets forth the computation for basic and diluted earnings per share for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ----------- ---------- ----------- Net income.............................. $10,546,000 $9,441,000 $13,753,000 =========== ========== =========== Denominator for basic earnings per share-weighted average shares outstanding............................ 6,604,887 6,649,075 6,583,356 Effect of diluted securities: Stock options issued to employees and directors............................ 128,360 162,266 194,871 ----------- ---------- ----------- Denominator for diluted earnings per share outstanding...................... 6,733,247 6,811,341 6,778,227 =========== ========== =========== Earnings per share: Basic................................. $1.60 $1.42 $2.09 Diluted............................... $1.57 $1.39 $2.03 =========== ========== ===========
At December 31, 1999 and 1998 there were on average 51,884 and 5,392 options outstanding, respectively, that were not included in diluted earnings per share because their effect would be antidilutive. There were no such options at December 31, 1997. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 11. Contingencies The Company and its subsidiary bank are not subject to any material pending or threatened legal actions as of December 31, 1999. The Company is a party to a revenue sharing agreement in connection with the sale of the Company's credit card portfolio in 1997. Under this agreement, the Company will share the revenue from the sold portfolio for each of the five twelve month periods beginning July, 1997, subject to a maximum annual payment of $900,000. Income recognized in accordance with the revenue sharing agreement amounted to $900,000 in 1999 and 1998 and $450,000 in 1997. Note 12. Stock-Based Compensation The Company has a nonqualified stock option plan for officers and directors. Options may be granted at a price not less than the market value on the date of grant, and are subject to a 3-year vesting for outside directors or a 3 or 5-year vesting schedule for all others and are exercisable, in part, beginning at least one year following the date of grant and no later than ten years from date of grant. Pro forma information regarding net income and earnings per share is required by Statement No. 123 "Accounting for Stock-Based Compensation" and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1999, 1998 and 1997, respectively: risk-free interest rates of 6.57%, 5.0% and 5.5%; dividend yields of 2.8%, 2.3% and 3.3%, volatility factor of the expected market price of the Company's Common Stock of 27.8%, 30% and 18%; and a weighted-average expected life of the option of 5 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For the purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
1999 1998 1997 ----------- ---------- ----------- Net income as reported.................. $10,546,000 $9,441,000 $13,753,000 Pro forma net income.................... $10,326,000 $9,324,000 $13,692,000 Earnings per share as reported: Basic................................. $ 1.60 $ 1.42 $ 2.09 Diluted............................... $ 1.57 $ 1.39 $ 2.03 Pro forma earnings per share: Basic................................. $ 1.56 $ 1.40 $ 2.08 Diluted............................... $ 1.53 $ 1.37 $ 2.02 Weighted-average fair value of options granted during the year................ $ 4.98 $ 5.82 $ 2.37
45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A summary of the Company's stock option activity, and related information for the years ended December 31 follows:
1999 1998 1997 ------------------ ------------------ ------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------- --------- ------- --------- -------- --------- Outstanding at the beginning of the year.. 448,624 $ 9.99 416,774 $ 8.48 619,238 $ 7.02 Granted................. 124,500 18.27 54,500 21.42 3,000 13.88 Exercised............... (57,798) 4.93 (13,750) 8.00 (185,064) 3.55 Forfeited............... (15,000) 17.63 (8,900) 12.29 (20,400) 9.90 ------- ------- -------- Outstanding at the end of the year............ 500,326 $12.40 448,624 $ 9.99 416,774 $ 8.48 ======= ======= ======== Exercisable at the end of the year............ 288,829 $ 9.13 279,424 $ 7.59 226,694 $ 6.96 ======= ======= ========
Exercise prices for options outstanding as of December 31, 1999 ranged from $2.62 to $24.00 per share. The weighted-average remaining contractual life of those options is 6.5 years. Note 13. Employee Benefit Plans The Company has a 401(k) savings plan that allows eligible employees to defer a percentage of their salary, not to exceed 10%, which will be matched by the Company based on a formula tied to Company profitability. The maximum Company liability is 4% of aggregate eligible salaries. All participant and employer contributions are 100% vested. For 1999, 1998 and 1997, the Company's expense for this plan was $335,000, $287,000 and $278,000, respectively. The Company also has a profit sharing plan, under which the Company, at its discretion, could contribute up to the maximum amount deductible for the year. For 1999, 1998 and 1997, the Company's expense for this plan was $193,000, $172,000 and $162,000, respectively. The Company has an executive deferred compensation plan. The purpose of this non-qualified plan is to allow certain executive officers the opportunity to maximize their elective contributions to the 401(k) savings plan and provide contributions notwithstanding certain restrictions or limitations in the Internal Revenue Code. For 1999, 1998 and 1997 the Company's expense for this plan was $109,000, $89,000 and $146,000, respectively. The Company also entered into supplemental pension agreements with certain executive officers. Under these agreements, the Company is obligated to provide at a prescribed retirement date, a supplemental pension based upon a percentage of executive officer's final base salary. For 1999, 1998, and 1997, the Company's expense for this plan was $172,000, $162,000 and $154,000, respectively. Note 14. Related Party Transactions The Company's bank subsidiary has made, and expects in the future to continue to make, loans to the directors, executive officers and associates of the Bank and the Company. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties and do not involve more than normal risk of collectibility. The aggregate amount of these loans was $8,953,000 and $7,727,000 at December 31, 1999 and 1998, respectively. During 1999, new related party loans totaled $5,950,000 and repayments totaled $4,724,000. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Certain principal shareholders of the Company are also principal shareholders of Amalgamated Investments Company, parent of Amalgamated Bank of Chicago. The Company's subsidiary bank periodically enters into loan participations with Amalgamated Bank of Chicago. At December 31, 1999 and 1998, there were no related party loan participations. Note 15. Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires the disclosure of the fair value of certain financial instruments. Fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported on the balance sheet for cash and short-term instruments approximate fair value. Interest-bearing deposits with banks: The fair value of interest-bearing deposits with banks is estimated using a discounted cash flow calculation that utilizes interest rates currently being offered for similar maturities. Investment securities: Fair values for investment securities are based on quoted market prices. Loans: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair value for all other loans is estimated using discounted cash flow analyses, which use interest rates currently being offered for similar loans of similar credit quality. The fair value does not include potential premiums available in a portfolio sale. Accrued interest receivable: The carrying amounts of accrued interest receivable approximate fair value. Deposit liabilities: The fair values for certain deposits (e.g., interest and noninterest-bearing demand deposits, savings deposits and NOW accounts) are, by definition, equal to the amount payable on demand. The fair value estimates do not include the intangible value of the existing customer base. The carrying amounts for variable rate money market accounts approximate their fair values. Fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected monthly maturities. Short-term debt: The carrying amounts of Federal funds purchased, overnight repurchase agreements and Treasury, tax and loan demand notes approximate their fair values. The fair values of term repurchase agreements are estimated using a discounted cash flow calculation that utilizes interest rates currently being offered for similar maturities. Federal Home Loan Bank borrowings: The fair value of the Federal Home Loan Bank borrowings is estimated using a discounted cash flow calculation that utilizes interest rates currently being offered for similar maturities. Accrued interest payable: The carrying amounts of accrued interest payable approximate fair value. Off-balance sheet instruments: Fair values for the Company's off-balance sheet instruments (letters of credit and lending commitments) are generally based on fees currently charged to enter into similar agreements. Limitations: The assumptions and estimates used in the fair value determination process are subjective in nature and involve uncertainties and significant judgment and, therefore, fair values cannot be determined with precision. Changes in assumptions could significantly affect these estimated values. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The estimated fair values of the Company's significant financial instruments as of December 31, 1999 and 1998, are as follows:
1999 1998 ----------------- ----------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- (Dollars in thousands) Financial Assets Cash and due from banks and Federal funds sold.................................... $ 47,080 $ 47,080 $ 42,121 $ 42,121 Interest-bearing deposits with banks..... 488 488 11,402 11,509 Investment securities.................... 348,607 347,384 297,674 300,401 Loans.................................... 719,969 709,504 631,987 633,822 Accrued interest receivable.............. 8,576 8,576 6,636 6,636 Financial Liabilities Time deposits............................ 469,508 469,419 368,646 372,255 Other deposits........................... 424,564 424,564 409,156 409,156 Short-term debt.......................... 98,008 98,048 87,268 87,276 Federal Home Loan Bank borrowings........ 63,000 59,870 57,500 58,021 Accrued interest payable................. 5,235 5,235 3,513 3,513 Off-balance sheet commitments Commercial............................... -- 67 -- 134 Home equity.............................. -- 92 -- 81 Check credit............................. -- 16 -- 17
Note 16. Parent Company Only Financial Information The following are the condensed balance sheets, statements of income and cash flows for First Oak Brook Bancshares, Inc.: Balance Sheets (Parent Company Only)
December 31, --------------- 1999 1998 ------- ------- (Dollars in thousands) Assets Cash and cash equivalents on deposit with subsidiary...... $ 499 $ 4,993 Investment in subsidiary.................................. 80,289 72,519 Securities available-for-sale............................. 1,425 785 Due from subsidiary....................................... 131 588 Equipment, net............................................ 2 22 Other assets.............................................. 651 258 ------- ------- Total Assets............................................ $82,997 $79,165 ======= ======= Liabilities and Shareholders' equity Other liabilities......................................... $ 2,998 $ 2,104 ------- ------- Total liabilities....................................... 2,998 2,104 Shareholders' equity...................................... 79,999 77,061 ------- ------- Total Liabilities and Shareholders' Equity.............. $82,997 $79,165 ======= =======
48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Statements of Income (Parent Company Only)
Years Ended December 31, ----------------------- 1999 1998 1997 ------- ------ ------- (Dollars in thousands) Income: Dividends from subsidiary........................ $ 333 $5,425 $ 5,094 Other income..................................... 878 1,060 1,067 Gain on sales of securities...................... 79 -- -- ------- ------ ------- Total income................................... 1,290 6,485 6,161 ------- ------ ------- Expenses: Other expenses................................... 2,637 2,158 2,978 ------- ------ ------- Total expenses................................. 2,637 2,158 2,978 ------- ------ ------- Income (loss) before income taxes and equity in undistributed net income of subsidiary............ (1,347) 4,327 3,183 Income tax benefit............................... 578 363 753 ------- ------ ------- Income (loss) before equity in undistributed net income of subsidiary.............................. (769) 4,690 3,936 Equity in undistributed net income of subsidiary...................................... 11,315 4,751 9,817 ------- ------ ------- Net income......................................... $10,546 $9,441 $13,753 ======= ====== =======
Statements of Cash Flows (Parent Company Only)
Years Ended December 31, ------------------------ 1999 1998 1997 ------- ------ ------- (Dollars in thousands) Cash flows from operating activities: Net income....................................... $10,546 $9,441 $13,753 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation................................... 20 27 27 Gain on sale of investment securities.......... (79) -- -- Increase in other assets....................... (393) (299) (39) Increase in other liabilities.................. 875 447 674 Decrease (increase) in due from subsidiary..... 457 (101) (391) Equity in undistributed net income of subsidiary.................................... (11,315) (4,751) (9,817) Amortization of intangible assets.............. -- 29 43 ------- ------ ------- Net cash provided by operating activities........ 111 4,793 4,250 Cash flows from investing activities: Purchases of available-for-sale securities..... (1,010) (488) (248) Sales of available-for-sale securities......... 505 240 1,493 Additions to equipment......................... -- (5) -- ------- ------ ------- Net cash provided by (used in) investing activities...................................... (505) (253) 1,245 Cash flows from financing activities: Exercise of stock options...................... 478 168 1,510 Purchase of treasury stock..................... (1,982) (2,546) (2,815) Cash dividends................................. (2,596) (2,282) (1,711) Capital contribution to subsidiary............. -- (2,250) (2,000) ------- ------ ------- Net cash used in financing activities............ (4,100) (6,910) (5,016) ------- ------ ------- Net increase (decrease) in cash and cash equivalents..................................... (4,494) (2,370) 479 Cash and cash equivalents at beginning of year... 4,993 7,363 6,884 ------- ------ ------- Cash and cash equivalents at end of year......... $ 499 $4,993 $ 7,363 ======= ====== =======
49 INDEPENDENT AUDITORS' REPORT The Board of Directors First Oak Brook Bancshares, Inc.: We have audited the accompanying consolidated balance sheets of First Oak Brook Bancshares, Inc. and subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the years then ended. 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. The accompanying consolidated financial statements of First Oak Brook Bancshares, Inc. and subsidiary for the year ended December 31, 1997, were audited by other auditors whose report thereon dated January 20, 1998, expressed an unqualified opinion on those statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Oak Brook Bancshares, Inc. and subsidiary as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ KPMG LLP Chicago, Illinois January 21, 2000 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 50 PART III ITEM 10. Directors and Executive Officers of the Registrant See "Directors and Executive Officers" on pages 5 and 6 of the Company's Proxy Statement and Notice of 2000 Annual Meeting to be filed on or before April 1, 2000, which is incorporated herein by reference. ITEM 11. Executive Compensation See "Summary Compensation Table" and footnotes, "Five Year Performance Comparison" and "Aggregated Option Exercises and Year-End Option Values Table" and "Option Grants Table" on pages 11 through 15, inclusive, of the Company's Proxy Statement and Notice of 2000 Annual Meeting to be filed on or before April 1, 2000, which is incorporated herein by reference. ITEM 12. Security Ownership of Certain Beneficial Owners and Management See "Information Concerning Security Ownership of Certain Beneficial Owners and Management" on pages 2 and 3 of the Company's Proxy Statement and Notice of 2000 Annual Meeting to be filed on or before April 1, 2000, which is incorporated herein by reference. ITEM 13. Certain Relationships and Related Transactions See "Certain Transactions" on page 7 of the Company's Proxy Statement and Notice of 2000 Annual Meeting to be filed on or before April 1, 2000, which is incorporated herein by reference. 51 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. FINANCIAL STATEMENTS The following consolidated financial statements are filed as part of this document under Item 8: Consolidated Balance Sheets--December 31, 1999 and 1998 Consolidated Statements of Income for each of the three years in the period ended December 31, 1999 Consolidated Statements of Changes in Shareholders' Equity for each of the three years in the period ended December 31, 1999 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1999 Notes to Consolidated Financial Statements Independent Auditors' Report (a) 2. FINANCIAL STATEMENT SCHEDULES Other than the opinion of the predecessor independent auditors, filed as Exhibit 99 hereto, all schedules have been included in the consolidated financial statements or the notes thereto or are either not applicable or not significant. (b) REPORTS ON FORM 8-K There were no reports on Form 8-K filed during the fourth quarter of 1999. (c) EXHIBITS Exhibit (3) Articles of Incorporation including Amendments thereto and By Laws of First Oak Brook Bancshares, Inc. (Exhibit 3 to the Company's Form 10-Q Quarterly Report for the period ended June 30, 1998, incorporated herein by reference). Exhibit (3.1) Restated Certificate of Incorporation of the Company (Exhibit 3.1 to the Company's Amendment No. 1 to Registration Statement on Form 8-A filed May 6, 1999, incorporated herein by reference.) Exhibit (3.2) Amended and Restated By-Laws of the Company (Exhibit 3.2 to the Company's Amendment No. 1 to Registration Statement on Form 8-A filed May 6, 1999, incorporated herein by reference.) Exhibit (4.1) Form of Common Stock Certificate (Exhibit 4.1 to the Company's Form 10-Q Quarterly Report for the period ended June 30, 1999, incorporated herein by reference). Exhibit (4.2) Rights Agreement, dated as of May 4, 1999 between the Company and Oak Brook Bank, as Rights Agent (Exhibit 4.1 to the Company's Registration Statement on Form 8-A filed May 21, 1999, incorporated herein by reference). Exhibit (4.3) Certificate of Designations Preferences and Rights of Series A Preferred Stock (Exhibit A to Exhibit 4.1 to the Company's Registration Statement on Form 8-A filed May 21, 1999, incorporated herein by reference). Exhibit (4.4) Form of Rights Certificate (Exhibit B to Exhibit 4.1 to the Company's Registration Statement on Form 8-A filed May 21, 1999, incorporated herein by reference). 52 Exhibit (10.1) Loan Agreement between First Oak Brook Bancshares, Inc. and LaSalle National Bank dated December 1, 1991 as amended. (Exhibit 10.1 to the Company's Form 10-Q Quarterly Report for the period ended June 30, 1999, incorporated herein by reference). Exhibit (10.3) First Oak Brook Bancshares, Inc. Executive Deferred Compensation Plan effective November 1, 1997. (Exhibit 10.3 to the Company's Form 10-K Annual Report for the year ended December 31, 1997, incorporated herein by reference). Exhibit (10.5) First Oak Brook Bancshares, Inc. Amended and Restated 1987 Stock Option Plan effective September 21, 1987. (Appendix A to the Company's Proxy and Notice of Annual Meeting of Shareholders filed April 1, 1998, incorporated herein by reference.) Exhibit (10.8) License Agreement, between Jack Henry & Associates, Inc. and First Oak Brook Bancshares, Inc. dated March 10, 1993. (Exhibit 10.8 to the Company's Form 10-K Annual Report for the year ended December 31, 1994, incorporated herein by reference). Exhibit (10.9) Form of Transitional Employment Agreement for Eugene P. Heytow, Richard M. Rieser, Jr. and Frank M. Paris. (Exhibit 10.9 to the Company's Form 10-K Annual Report for the year ended December 31, 1998, incorporated herein by reference.) Exhibit (10.10) Form of Transitional Employment Agreement for Senior Officers. (Exhibit 10.10 to the Company's Form 10-K Annual Report for the year ended December 31, 1998, incorporated herein by reference.) Exhibit (10.11) Form of Agreement Regarding Post-Employment Restrictive Covenants for Eugene P. Heytow, Richard M. Rieser, Jr. and Frank M. Paris. (Exhibit 10.11 to the Company's Form 10-K Annual Report for the year ended December 31, 1994, incorporated herein by reference). Exhibit (10.12) Form of Supplemental Pension Benefit Agreement for Eugene P. Heytow. (Exhibit 10.12 to the Company's Form 10-K Annual Report for the year ended December 31, 1994, incorporated herein by reference). Exhibit (10.13) Form of Supplemental Pension Benefit Agreement for Richard M. Rieser, Jr. (Exhibit 10.13 to the Company's Form 10-K Annual Report for the year ended December 31, 1994, incorporated herein by reference). Exhibit (10.14) Senior Executive Insurance Plan. (Exhibit 10.14 to the Company's Form 10-K Annual Report for the year ended December 31, 1995, incorporated herein by reference). Exhibit (10.15) First Oak Brook Bancshares, Inc. Performance Bonus Plan amended and restated effective May 7, 1996. (Exhibit 10.15 to the Company's Form 10-K Annual Report for the year ended December 31, 1996, incorporated herein by reference). Exhibit (10.16) First Oak Brook Bancshares, Inc. Directors Stock Plan (Form S-8 filed October 25, 1999, incorporated herein by reference). Exhibit (13)1999 Summary Annual Report to Shareholders. Exhibit (21)Subsidiary of the Registrant. Exhibit (23.1) Consent of KPMG LLP. Exhibit (23.2) Consent of Ernst & Young LLP. 53 Exhibit (27) Financial Data Schedule. Exhibit (99) Ernst & Young LLP Opinion. Exhibits 10.3, 10.5 and 10.9 through 10.15 are management contracts or compensatory plans or arrangements required to be filed as an Exhibit to this Form 10-K pursuant to Item 14(c) hereof. 54 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. First Oak Brook Bancshares, Inc. (Registrant) /s/ Eugene P. Heytow By: _________________________________ (Eugene P. Heytow, Chairman of the Board and Chief Executive Officer) Date: March 17, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Eugene P. Heytow Chairman of the Board and March 17, 2000 ______________________________________ Chief Executive Officer Eugene P. Heytow /s/ Frank M. Paris Vice Chairman of the Board March 17, 2000 ______________________________________ Frank M. Paris /s/ Richard M. Rieser, Jr. President, Assistant March 17, 2000 ______________________________________ Secretary, and Director Richard M. Rieser, Jr. /s/ Miriam Lutwak Fitzgerald Director March 17, 2000 ______________________________________ Miriam Lutwak Fitzgerald /s/ Geoffrey R. Stone Director March 17, 2000 ______________________________________ Geoffrey R. Stone /s/ Michael L. Stein Director March 17, 2000 ______________________________________ Michael L. Stein /s/ Stuart I. Greenbaum Director March 17, 2000 ______________________________________ Stuart I. Greenbaum /s/ Robert Wrobel Director March 17, 2000 ______________________________________ Robert Wrobel /s/ John W. Ballantine Director March 17, 2000 ______________________________________ John W. Ballantine /s/ Rosemarie Bouman Vice President and Chief March 17, 2000 ______________________________________ Financial Officer Rosemarie Bouman
55 EX-13 2 1999 SUMMARY OF ANNUAL REPORT TO SHAREHOLDERS 1999 Summary Annual Report www.firstoakbrook.com........................................................... First Oak Brook Bancshares, Inc., organized in 1983 and publicly-traded since 1985, is a $1.15 billion asset bank holding company. Its subsidiary, Oak Brook Bank, operates primarily in the affluent and growing western suburbs of Chicago. - -------------------------------------------------------------------------------- Contents Financial Highlights....................................................... 3 Management Letter.......................................................... 4 1999 Financial Highlights.................................................. 5 1999 Shareholder Highlights................................................ 6 1999 Other Highlights...................................................... 8 2000 Initiatives........................................................... 9 10-year Summary of Financial Data.......................................... 10 Balance Sheets and Statements of Income....................................12,13 A Guide to Our Company..................................................... 14 Directors and Officers..................................................... 18 Independent Auditors' Report............................................... 18 Shareholder Information.................................................... 19 Forward-Looking Statements This summary annual report to shareholders contains certain forward looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors which could cause actual results to differ from these estimates. These factors include, but are not limited to, changes in: general economic conditions, interest rates, legislative or regulatory changes, loan demand, depositor preferences and the ability to attract and retain experienced senior management. Therefore, there can be no assurances that future actual results will correspond to these forward-looking statements.
First Oak Brook Bancshares, Inc. - -------------------------------------------------------------------------------- Financial Highlights At and for the year ended December 31, (Dollars in thousands except per share amounts) 1999 1998 Net Income Net income $ 10,546 $ 9,441 Per Share Basic earnings per share $ 1.60 $ 1.42 Diluted earnings per share 1.57 1.39 Book value at year-end 12.04 11.46 Market price at year-end (1) 18.50 18.50 Cash dividends paid (1) .40 .345 Balance Sheet Highlights Total assets $1,146,356 $1,009,275 Loans, net of unearned discount 719,969 631,987 Demand deposits 196,243 187,209 Total deposits 894,072 777,802 Shareholders' equity 79,999 77,061 Performance Ratios Return on average assets .99% 1.02% Return on average equity 13.30% 12.74%
(1) On May 4, 1999, the shareholders approved the reclassification of the Common stock into the Class A common stock on a one for one basis. As a result, the Class A common stock is now the only class of outstanding common stock and has been renamed "Common" stock. Historical dividend and price information shown is that of the former Class A common stock. 3 - -------------------------------------------------------------------------------- Management Letter For the first time, we are presenting a Summary Annual Report because, we believe, it's simpler and clearer. In it we've included most of what you would want to know about us. For those who want more details, you can find them in our SEC Form 10K filing. For shareholders, our 10K accompanies this Summary; for everyone else, it's available from the SEC's EDGAR database which is directly linked to our website at www.firstoakbrook.com. The most important information we have included in this Summary is: 1999 Financial, Shareholder & Other Highlights and 2000 Initiatives; Balance Sheets and Statements of Income; 10 year Summary of Financial Data; and a Guide to our Company, focusing on our strategies, markets, distribution system, products and services, and competitive advantages. This Summary describes a decade of growth in profits, assets and shareholders' equity. We believe this enviable record is attributable to our continuing technological sophistication, which lets us custom-tailor banking products for our individual clients, and to our other long-range strategies, more fully described in the following pages. We trust that building on this successful approach will help us thrive in the new millennium. And we thank you for your continuing confidence in our Company. /s/ Eugene P. Heytow /s/ Frank M. Paris /s/ Richard M. Rieser Eugene P. Heytow Frank M. Paris Richard M. Rieser, Jr., Chairman Vice-Chairman President March 1, 2000 4 First Oak Brook Bancshares, Inc. - -------------------------------------------------------------------------------- 1999 Financial Highlights Statement of Income . Net income. Profits were up $1,105,000 or 12% to $10,546,000 in 1999 from $9,441,000 in 1998. . Earnings per share. Diluted earnings per share rose 13% to $1.57 in 1999 from $1.39 in 1998. . Total revenues. Net interest income plus other income increased $4,902,000 or 13% to $41,303,000 in 1999 from $36,401,000 in 1998. This growth was attributable to a 14% increase in net interest income and a 12% increase in fee income, primarily from cash management, investment management and merchant credit card processing fees. . Other expenses. Other expenses rose $3,217,000 or 14% to $25,640,000 in 1999 from $22,423,000 in 1998. New positions and salary increases, higher merchant credit card interchange expense and costs associated with new branches in Glen Ellyn (opened 9/98), and LaGrange (opened 9/99) contributed to higher operating expenses. Balance Sheet . Total assets. Assets climbed $137,081,000 or 14% to a record $1,146,356,000 at December 31, 1999 from $1,009,275,000 at December 31, 1998. . Loans. Loans grew $87,982,000 or 14% to $719,969,000 in 1999 from $631,987,000 in 1998. This growth included $50 million (up 30%) in indirect auto loans, $25 million (up 16%) in commercial real estate and construction loans, and $12 million (up 17%) in home equity loans. . Deposits. Total deposits were up $116,270,000 or 15% to $894,072,000 in 1999 from $777,802,000 in 1998. Noninterest-bearing deposits rose 11% on average from 1998 to 1999. . Shareholders' equity. Shareholders' equity increased $2,938,000 or 4% to $79,999,000 in 1999 from $77,061,000 in 1998. This growth occurred after the payout of $2,596,000 in cash dividends to shareholders, Common stock repurchases of $1,982,000, and the decline of $3,508,000 in market value of the Company's available-for-sale investment portfolio (typically, when rates rise, as they did in 1999, the market value of fixed-income securities falls, although these losses would not be incurred unless these securities are sold). . Capital ratios. The Company and Oak Brook Bank's capital ratios continued to exceed regulatory criteria for "well-capitalized" holding companies and banks. Because of this, we pay lower FDIC insurance premiums and are subject to expedited treatment when seeking approval of certain acquisition and expansion activities. . Asset quality. Asset quality remained excellent. Nonperforming assets totaled just $372,000 or .03% of total assets at year-end 1999. Net loan charge-offs for 1999 totaled $457,000 or .07% of average loans outstanding. 5 - -------------------------------------------------------------------------------- 1999 Shareholder Highlights Our Stock Price . Our stock price beat the bank indexes. Our Common stock price remained flat, both starting and ending 1999 at $18.50 per share, while the NASDAQ Bank Index dropped 8% and the Standard & Poor's Bank Index fell 15.3%. . In 1999 the banking industry fell out of favor with investors. The banking sector of the market fell into disfavor in 1999. Two causes are frequently mentioned: 1. Rising interest rates. The Fed--to contend with inflationary fears--began pushing interest rates up. In the past, higher interest rates have generally created tighter margins for banks, dampened loan demand, and increased credit risk. 2. Technology looked more attractive. Rapid price increases in emerging technology, communications and internet shares drew investors away from "value" sectors of the stock market--like banking. Ironically, the accelerating stock prices of these emerging growth companies--including many start-ups with no history of earnings--was cited by the Fed as evidence of inflation, which, in part, triggered the Fed's tightening and made bank stocks look even less attractive. . Our 1999 stock price held up compared to peers. We think our stock price held up because: 1. We have a conservative philosophy, which helps the predictability of our earnings, and makes for a very attractive franchise. This is outlined in the "Guide to our Company" which follows on pages 14 to 17. (Price to Earnings (P/E) and Price to Book (P/B) Bar chart omitted) 2. Our stock has historically sold for lower price to earnings (P/E) and price to book (P/B) multiples than our peers. The chart to the left traces this relationship. In essence, even in the "value" sector, our stock appeared to be a better value. 3. Our stock is more visible than ever before. In 1999 our visibility improved because: (i) As a result of our investor relations efforts, we added four new market makers in our stock: Keefe, Bruyette & Woods, Inc.; Stifel, Nicolaus & Co., Inc.; Sandler, O'Neill & Partners, L.P.; and Mayer & Schweitzer, Inc. We also received research coverage from five of our seven market makers. (ii) We completed the combination of our two classes of common stock and shortened our NASDAQ ticker symbol to "FOBB." Each share is now entitled to one vote and the same dividend. This move was significant because we believe some investors would not consider purchasing our old Class A limited voting shares, others would not consider the value of our old high voting Common "control" shares as part of our public market capitalization, and a few even believed the exis- 6 Dividends and Stock Buy-Backs tence of high voting Common "control" shares was tantamount to a "not for sale at any price" sign over our door. With the new single class of Common, we believe these issues have been addressed. . Dividends. The Company has paid consecutive quarterly dividends since its incorporation in 1983. The annual dividend payout has increased over the last nine years--at an average rate of 18% (see Chart to the right). In 1999 the dividend payout ratio was 25%; and the dividend yield was 2.2%, using the Common stock dividend of $.40 per share paid in 1999 and the year-end 1999 closing stock price of $18.50. In January, 2000 the Board of Directors increased the quarterly dividend 10%--to $.11 per share. ------------------------------------------------------------------- Dividends Per share (1) [BAR CHART APPEARS HERE] .40 .400 .35 .345 .30 .25 .270 .20 .190 .15 .118 .138 .158 .10 .107 .110 .05 .00 1991 1992 1993 1994 1995 1996 1997 1998 1999 ------------------------------------------------------------------- . Stock buy-backs. In 1999 we repurchased 105,500 shares of Common stock for a total cost of $1,982,000 at an average cost of $18.79 per share. In January 2000, we completed our 1998 stock repurchase plan, and the Board authorized another stock repurchase program allowing the Company to buy back up to 200,000 more shares of our Common stock. The Board believes that judicious stock buy backs, among other benefits, can provide shareholders with a desirable tax-efficient supplement to cash dividends since buy-backs increase remaining shareholders' percentage interests in the Company. - -------------------------------------------------------------------------------- Stock Data(1)
Per Share ----------------------------------------------------------- Diluted Net Dividends Book Low High Quarter Quarter Ended Income Paid Value Price(2) Price(2) End Price December 31, 1999 $.41 $.100 $12.04 $18.00 $19.38 $18.50 September 30, 1999 .40 .100 12.04 18.69 21.00 18.75 June 30, 1999 .39 .100 11.70 16.50 21.00 20.13 March 31, 1999 .37 .100 11.76 17.44 19.00 17.44 December 31, 1998 .40 .090 11.46 17.75 20.25 18.50 September 30, 1998 .37 .090 11.26 19.75 22.56 19.75 June 30, 1998 .32 .090 10.78 22.44 25.50 23.25 March 31, 1998 .30 .075 10.69 20.75 25.44 25.00
(1) On May 4, 1999, the shareholders approved the reclassification of the Common stock into the Class A common stock on a one for one basis. As a result, the Class A common stock is now the only class of outstanding common stock and has been renamed "Common" stock. Historical dividend and price information shown is that of the former Class A common stock. (2) The prices shown represent the high and low closing sales prices for the quarter. 7 - -------------------------------------------------------------------------------- 1999 Other Highlights Y2K . Y2K fears unfounded. Y2K preparations were completed on time. This potential year-end issue proved to be uneventful. Distribution Points . New branches. In September 1999 our LaGrange branch opened its doors. As shown on the "Branch Demographics" chart on page 14, this office has been well-received. . New cyberspace branch. In November 1999 our Internet Branch located at www.obb.com became a fully functional complement to our 12 brick and mortar offices. Customers gained another way to access many of our products and services. Cash Management . Business banking leapt ahead with technological advances. Our W.E.B.S business banking service now permits customers to exchange with us critical computer files over the Internet using standard browsers, rather than specialized software. We now deliver CD-Roms to commercial customers which lets them look up check images on their own premises. And we developed a number of customized software systems to meet our clients' specialized needs. Investment Management . Portfolio management enhanced. Our rapidly growing Investment Management and Trust Department recruited Dr. Douglas Madigan, Ph.D. in Economics and CFA, a nationally-recognized equity portfolio manager as our Chief Investment Officer. Under his direction, we expect to augment our reputation as a money manager. Human Resources . Performance improvement. For the first time in 1999, we built a scorecard to help measure department heads' and managers' performance. Bonuses were directly tied to this scorecard. We intend to continue to expand and refine this program. 8 First Oak Brook Bancshares, Inc. - -------------------------------------------------------------------------------- 2000 Initiatives The Plan Our commitment to planning is legend here. It's a year-round process. We list below some of our most important goals for 2000: . Commercial lending. To improve our net interest margin, we plan to expand our sales effort. The more opportunities we find, the more commercial loans we'll make. Calling officers have well-defined sales goals and, for those without loan authority, added financial incentives to sell. . Investment Management. We're going to launch an advertising and public relations campaign to publicize our investment capabilities. This will include events aimed at cross-sales to our existing customer base and a regional radio blitz. The message will be "Disciplined investing for serious money." . New branches. We've signed a lease for our first Chicago branch at Huron and Dearborn Streets in the River North area, just a few blocks west of Michigan Avenue's Magnificent Mile. This office will be staffed with some of our best commercial and retail bankers. It is expected to open in the Fall. We continue to seek other attractive branch sites. . Training. New training methods are being introduced that are based on the following simple principles: short sessions; substance reduced to a few memorable points; eliminating the fluff and treating trainees like adults; clear, concise written summaries to take home; real practice, repetition and testing. . Retail Banking. Sales will be emphasized and rewarded. To that end, training will focus on product knowledge and sales skills. Two initiatives involve selling bank-at-work accounts and neighborhood small business accounts. . Cash Management. Two new systems will be offered. The first is Automated Wholesale Lockbox which allows us to truncate paper and provide information about collections to our customers, faster and easier, through data transmission. The second is the enhancement to our W.E.B.S. business banking system which allows our clients to look up a check image over the Internet as soon as an item clears. . New products. We are investigating the best ways to offer a wide array of insurance products and securities trading at our web site. . New businesses. We are establishing a real estate subsidiary of Oak Brook Bank to develop low and moderate income housing and ancillary commercial space in the Chicago area. In addition, we are investigating the possibility of offering armored courier services which would complement our banking services to retailers. 9
- ------------------------------------------------------------------------------------------------------- 10-Year Earnings Summary and Selected Consolidated Financial Data (Dollars in thousands except per share data) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------- Statement of Income Data Net interest income.............................................. $ 32,337 $ 28,410 $ 27,432 Provision for loan losses........................................ 840 630 1,550 Net interest income after provision for loan losses.............. 31,497 27,780 25,882 Other income..................................................... 8,966 7,991 15,541(1) Other expenses................................................... 25,640 22,423 20,708 Income before provision for income taxes......................... 14,823 13,348 20,715 Provision for income taxes....................................... 4,277 3,907 6,962 Net income....................................................... $ 10,546 $ 9,441 $ 13,753 - ------------------------------------------------------------------------------------------------------- Common Stock Data(2) Basic earnings per share......................................... $1.60 $1.42 $2.09 Diluted earnings per share....................................... 1.57 1.39 2.03 Cash dividends paid per share (3)................................ .40 .345 .270 Book value per share............................................. 12.04 11.46 10.38 Closing price of common stock per share (3) High........................................................... 21.00 25.50 25.19 Low............................................................ 16.50 17.75 11.38 Year-end....................................................... 18.50 18.50 24.00 Dividends per share to closing price............................. 2.2% 1.9% 1.1% Closing price to diluted earnings per share...................... 11.8x 13.3x 11.8x Market capitalization............................................ $ 120,829 $ 121,783 $160,477 Period end shares outstanding.................................... 6,531,314 6,582,840 6,686,560 Volume of shares traded.......................................... 1,656,449 1,908,594 3,447,438 - ------------------------------------------------------------------------------------------------------- Year End Balance Sheet Data Total assets..................................................... $1,146,356 $1,009,275 $816,144 Loans, net of unearned discount.................................. 719,969 631,987 447,332 Allowance for loan losses........................................ 4,828 4,445 4,329 Investment securities............................................ 348,607 297,674 302,098 Demand deposits.................................................. 196,243 187,209 153,806 Total deposits................................................... 894,072 777,802 627,763 Federal Home Loan Bank borrowings................................ 63,000 57,500 42,500 Shareholders' equity............................................. 79,999 77,061 71,661 - ------------------------------------------------------------------------------------------------------- Financial Ratios Return on average assets......................................... .99% 1.02% 1.76% Return on average equity......................................... 13.30 12.74 21.72 Net interest margin.............................................. 3.35 3.43 3.97 Net interest spread.............................................. 2.35 2.34 2.86 Dividend payout ratio............................................ 24.62 24.17 12.43 - ------------------------------------------------------------------------------------------------------- Capital Ratios Average equity to average total assets........................... 7.41% 8.00% 8.11% Tier 1 capital ratio............................................. 10.05 10.20 13.70 Total capital ratio.............................................. 10.65 10.80 14.55 Capital leverage ratio........................................... 7.12 7.61 8.57 - ------------------------------------------------------------------------------------------------------- Asset Quality Ratios Nonperforming loans to total loans............................... .05% .04% .09% Nonperforming assets to total loans and other real estate owned.. .05 .04 .09 Nonperforming assets to total capital............................ .47 .35 .53 Allowance for loan losses to total loans......................... .67 .70 .97 Net charge-offs to average loans................................. .07 .10 .32 Allowance for loan losses to nonperforming loans................. 12.98x 16.34x 11.45x
(1) Included in other income in 1997 was the $9,251,000 gain on the sale of our credit card portfolio. (2) Common Stock data has been restated to give effect to the following stock dividends: 100% effective September 3, 1998, 50% effective September 8, 1994, 25% effective December 23, 1993, and 50% effective November 23, 1992. 10
FIRST OAK BROOK BANCHSARES, INC. - ------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands At and for the year ended December 31, except per share data) 1996 1995 1994 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------------------------ Net interest income.......... $ 26,834 $ 25,476 $ 24,296 $ 21,315 $ 18,156 $ 17,291 $ 16,734 Provision for loan losses.... 1,510 1,050 1,200 960 870 550 701 Net interest income after provision for loan losses... 25,324 24,426 23,096 20,355 17,286 16,741 16,033 Other income................. 4,647 4,186 4,098 5,112 4,977 3,123 2,789 Other expenses............... 20,435 19,924 19,173 18,379 16,806 15,701 14,411 Income before provision for income taxes............ 9,536 8,688 8,021 7,088 5,457 4,163 4,411 Provision for income taxes... 2,429 1,996 1,827 1,555 1,144 738 937 Net income................... $ 7,107 $ 6,692 $ 6,194 $ 5,533 $ 4,313 $ 3,425 $ 3,474 - ------------------------------------------------------------------------------------------------------------------------ Basic earnings per share..... $ 1.06 $ 1.00 $ .92 $ .83 $ .64 $ .52 $ .52 Diluted earnings per share... 1.03 .98 .91 .81 .64 .51 .52 Cash dividends paid per share (3)................... .190 .158 .138 .118 .110 .107 .107 Book value per share......... 8.62 8.23 6.27 6.63 5.58 5.03 4.64 Closing price of common stock per share (3) High........................ 12.75 10.75 10.25 7.74 5.87 5.25 4.31 Low......................... 10.25 8.25 7.25 5.07 4.31 2.58 2.58 Year-end.................... 11.63 10.32 8.63 7.17 5.20 4.67 3.02 Dividends per share to closing price............... 1.6% 1.5% 1.6% 1.6% 2.1% 2.3% 3.5% Closing price to diluted earnings per share.......... 11.3x 10.5x 9.5x 8.9x 8.1x 9.2x 5.8x Market capitalization........ $ 78,458 $ 69,409 $ 58,037 $ 48,213 $ 34,967 $ 31,080 $ 20,099 Period end shares outstanding................. 6,746,186 6,725,684 6,725,084 6,724,226 6,724,515 6,655,211 6,655,286 Volume of shares traded...... 1,133,042 2,011,048 2,134,482 1,511,475 1,413,934 2,036,649 1,762,903 - ------------------------------------------------------------------------------------------------------------------------ Total assets................. $ 768,655 $ 678,102 $ 634,705 $ 613,574 $ 514,913 $ 460,183 $ 451,056 Loans, net of unearned discount.................... 420,164 362,728 309,681 278,177 265,538 202,928 204,261 Allowance for loan losses.... 4,109 3,932 3,859 3,231 2,890 2,514 2,401 Investment securities........ 265,954 256,192 263,943 223,988 180,108 170,048 137,205 Demand deposits.............. 147,497 128,236 109,237 113,780 94,222 82,724 121,341 Total deposits............... 648,303 555,086 513,623 508,173 436,599 401,990 396,376 Federal Home Loan Bank borrowings.................. -- 3,500 6,000 6,000 -- -- -- Shareholders' equity......... 59,553 53,762 42,909 44,118 37,764 34,223 31,459 - ------------------------------------------------------------------------------------------------------------------------ Return on average assets..... .97% 1.03% 1.01% .95% .84% .74% .84% Return on average equity..... 12.77 14.00 14.54 13.85 12.00 10.46 11.66 Net interest margin.......... 4.20 4.54 4.61 4.44 4.33 4.50 4.86 Net interest spread.......... 3.23 3.57 3.87 3.75 3.47 3.25 3.22 Dividend payout ratio........ 18.63 14.63 14.13 16.75 15.63 19.33 19.03 - ------------------------------------------------------------------------------------------------------------------------ Average equity to average total assets................ 7.59% 7.39% 6.95% 6.89% 6.98% 7.03% 7.17% Tier 1 capital ratio......... 12.66 13.33 13.37 11.88 12.30 13.05 11.64 Total capital ratio.......... 13.54 14.32 14.46 12.83 13.24 14.03 13.58 Capital leverage ratio....... 7.69 7.94 7.50 6.56 7.27 7.24 6.83 - ------------------------------------------------------------------------------------------------------------------------ Nonperforming loans to total loans................. .49% .03% .21% .11% .17% .26% .38% Nonperforming assets to total loans and other real estate owned........... .49 .03 .21 .46 .54 .26 .38 Nonperforming assets to total capital............... 3.49 .19 1.49 2.92 3.80 1.57 2.48 Allowance for loan losses to total loans.............. .98 1.08 1.25 1.16 1.09 1.24 1.18 Net charge-offs to average loans....................... .34 .30 .20 .23 .22 .22 .20 Allowance for loan losses to nonperforming loans...... 1.98x 37.81x 6.05x 10.99x 6.54x 4.68x 3.08x
(3) On May 4, 1999, the shareholders approved the reclassification of the Common stock into Class A common stock on a one for one basis. As a result, the Class A common stock is now the only class of outstanding common stock and has been renamed "Common" stock. Historical dividend and price information shown is that of the former Class A common stock. 11
- --------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheets December 31, (Dollars in thousands) 1999 1998 Assets Cash and due from banks............................................................... $ 47,080 $ 41,759 Federal funds sold.................................................................... -- 362 Interest-bearing deposits with banks.................................................. 488 11,402 Investment securities: Securities held-to-maturity, at amortized cost (fair value of $93,202 and $143,980 in 1999 and 1998, respectively)........................................ 94,425 141,253 Securities available-for-sale, at fair value......................................... 254,182 156,421 Loans, net of unearned discount....................................................... 719,969 631,987 Less-allowance for loan losses........................................................ (4,828) (4,445) ---------- ---------- Net loans............................................................................ 715,141 627,542 Premises and equipment, net........................................................... 21,809 21,032 Other assets.......................................................................... 13,231 9,504 ---------- ---------- Total Assets.......................................................................... $1,146,356 $1,009,275 ========== ========== Liabilities and Shareholders' Equity Noninterest-bearing demand deposits................................................... $ 196,243 $ 187,209 Interest-bearing deposits: Savings deposits and NOW accounts.................................................... 171,135 177,572 Money market accounts................................................................ 57,186 44,375 Time deposits: Under $100,000.................................................................... 236,108 181,924 $100,000 and over................................................................. 233,400 186,722 ---------- ---------- Total interest-bearing deposits....................................................... 697,829 590,593 ---------- ---------- Total deposits........................................................................ 894,072 777,802 Federal funds purchased and securities sold under agreements to repurchase............ 78,008 83,586 Treasury, tax and loan demand notes................................................... 20,000 3,682 Federal Home Loan Bank borrowings..................................................... 63,000 57,500 Other liabilities..................................................................... 11,277 9,644 ---------- ---------- Total Liabilities..................................................................... $1,066,357 $ 932,214 ---------- ---------- Shareholders' Equity: Preferred stock, series B, no par value, authorized--100,000 shares, issued--none.... -- -- Class A common stock, $2 par value, authorized--10,000,000 shares, issued-- 4,019,902 shares, outstanding--3,666,902 shares in 1998............................. -- 8,040 Common stock, $2 par value, authorized--16,000,000 shares in 1999 and 6,000,000 shares in 1998, issued--7,283,256 shares in 1999 and 3,263,354 shares in 1998, outstanding--6,531,314 shares in 1999 and 2,915,938 shares in 1998.................. 14,567 6,527 Surplus.............................................................................. 11,985 11,955 Accumulated other comprehensive income (loss)........................................ (1,245) 2,263 Retained earnings.................................................................... 62,356 54,406 Less cost of shares in treasury, 751,942 common shares in 1999, and 353,000 Class A common and 347,416 common shares in 1998............................................ (7,664) (6,130) ---------- ---------- Total Shareholders' Equity............................................................ 79,999 77,061 ---------- ---------- Total Liabilities and Shareholders' Equity............................................ $1,146,356 $1,009,275 ========== ==========
12 First Oak Brook Bancshares, Inc. - --------------------------------------------------------------------------------
Consolidated Statements of Income (Dollars in thousands except per share amounts) Years Ended December 31, 1999 1998 1997 Interest income: Interest and fees on loans......................... $50,078 $40,811 $36,305 Interest on securities: U.S. Treasury and Government agencies............. 14,208 14,127 14,412 Obligations of states and political subdivisions.. 2,825 2,574 2,517 Other securities.................................. 830 1,314 631 Interest on Federal funds sold and securities purchased under agreements to resell.............. 1,118 2,106 460 Interest on deposits with banks.................... 401 764 362 ------------------------- Total interest income................................ 69,460 61,696 54,687 Interest expense: Interest on savings deposits and NOW accounts...... 4,765 5,711 6,159 Interest on money market accounts.................. 1,648 1,302 1,089 Interest on time deposits.......................... 23,428 20,016 16,125 Interest on Federal funds purchased and securities sold under agreements to repurchase............... 3,042 2,491 2,612 Interest on treasury, tax and loan demand notes.... 370 523 489 Interest on Federal Home Loan Bank borrowings...... 3,870 3,243 781 ------------------------- Total interest expense............................... 37,123 33,286 27,255 ------------------------- Net interest income.................................. 32,337 28,410 27,432 Provision for loan losses............................ 840 630 1,550 ------------------------- Net interest income after provision for loan losses.. 31,497 27,780 25,882 ------------------------- Other income: Service charges on deposit accounts................ 3,600 3,190 2,730 Investment management and trust fees............... 1,128 1,048 1,025 Merchant card processing fees...................... 1,858 1,329 964 Fees on mortgages sold............................. 422 416 224 Income from revenue sharing agreement.............. 900 900 450 Other operating income............................. 979 1,029 906 Investment securities gains (losses), net.......... 79 79 (9) Gain on sale of credit card portfolio.............. -- -- 9,251 ------------------------- Total other income................................... 8,966 7,991 15,541 ------------------------- Other expenses: Salaries and employee benefits..................... 15,817 13,680 12,293 Occupancy expense.................................. 1,683 1,566 1,457 Equipment expense.................................. 1,824 1,906 1,566 Data processing.................................... 968 776 1,301 Postage, stationery and supplies................... 865 834 768 Advertising and business development............... 1,231 1,090 1,191 Merchant interchange expense....................... 1,419 994 697 Other operating expenses........................... 1,833 1,577 1,435 ------------------------- Total other expenses................................. 25,640 22,423 20,708 ------------------------- Income before income taxes........................... 14,823 13,348 20,715 Income tax expense................................... 4,277 3,907 6,962 ------------------------- Net income........................................... $10,546 $ 9,441 $13,753 ========================= Basic earnings per share............................. $ 1.60 $ 1.42 $ 2.09 ========================= Diluted earnings per share........................... $ 1.57 $ 1.39 $ 2.03 =========================
13 A Guide to Our Company Strategies Our long-term vision is: . To build a leading business bank in Chicago's western suburbs; . To combine the sophisticated products and delivery capabilities of a mega- bank with the personal service of a community bank; . To be customer-driven: customizing, not commoditizing our products and services; and . To earn an above-average return while taking less than average risk. Markets & Marketing We market by geography, by product, and through alternative delivery channels. Top-line revenue-generating products are sold regionally. Distribution is through multiple convenient channels. [MAP SHOWING BRANCH OFFICE LOCATIONS has been omitted] Branch Offices. Eleven of our twelve banking offices are located in Chicago's western suburbs. The twelfth office in Glenview is operated on Chicago's affluent North Shore. The total population living within three miles of each office totals 985,000 and enjoys an average household income (AHI) of $93,000 which is significantly higher than the AHI for the Chicago area or the United States. Our superior demographics by branch and branch locations, and the principal Chicago area submarkets are shown below. - ------------------------------------------------------------------ Chicago Suburban Markets (1)
Average Population Household Population Income Growth West (11 offices) 1,051,000 $ 87,000 22% Northwest 866,000 89,000 30% North (1 office) 720,000 121,000 11% South/Southwest 672,000 76,000 20% Far Northwest 446,000 83,000 55% Far West 371,000 77,000 67% Chicago 2,513,000 55,000 (6%)
(1) Source: Claritas, Inc.: 1999 population and average household income; population growth 1980-1999 - ------------------------------------------------------------------ - -------------------------------------------------------------------------- Branch Demographics*--3 Mile Radius(1)
Location Branch Average (year acquired Deposits Household or opened) ($ in thousands) Population Income Addison (acq. '74) $ 66,691 86,009 $ 73,639 Aurora ('98) 16,632 47,735 62,996 Bensenville ('86) 18,704 56,554 73,213 Broadview (Acq. '89) 50,616 161,152 66,115 Burr Ridge ('88) 55,143 52,115 109,850 Glen Ellyn ('98) 16,803 118,010 81,593 Glenview ('90) 44,236 70,023 165,190 LaGrange ('99) 12,708 100,853 89,728 Lisle ('85) 23,273 104,739 100,957 Naperville ('88) 38,496 71,659 103,810 Oak Brook (acq. '76) 515,810 80,063 103,763 Warrenville (acq. '83) 34,960 35,895 88,039
* as of 12/31/99 (1) Source: Claritas, Inc.: 1999 population and average household income - -------------------------------------------------------------------------- 14 Our brick and mortar branch concentration in the western suburbs provides local businesses and consumers with a convenient and efficient source of high touch banking. It also contributes to the awareness of the Oak Brook Bank brand in its prime market, representing a base of strength readily exportable to the rest of Chicagoland. Notwithstanding the growing importance of plastic and electronic funds, our customers still perceive their money as a "tangible" requiring protection in secure premises and, consequently, have reacted favorably to our expanding physical presence. Products. We also market key business products on a regional basis. Rapidly growing top line revenue drivers in business banking include cash management services, commercial real estate and commercial loans, automobile dealer business, and investment management and trust services. The tables below depict the strong growth trends in each of these product lines. These services are largely offered through individual sales calls made by 20 full-time business development officers. We market key consumer products primarily through regional radio, newspaper, direct mail advertising and, to a lesser extent, through an Internet site. This marketing is supported by a staff of consumer and mortgage loan originators, a full service, seven-days-a-week Call Center, and retail bankers in our 12 offices.
- ---------------------------------------------------------------------- Commercial Banking and Cash Management ($ in millions) 1996 1997 1998 1999 Fee Income: Account Analysis $1.4 $1.7 $2.2 $2.6 Merchant Processing .5 1.0 1.3 1.9 Sweep Accounts .1 .1 .2 .2 Commercial Checking Deposits at year end 116 120 154 159 - ---------------------------------------------------------------------- Commercial Lending ($ in millions) 1996 1997 1998 1999 Commercial Real Estate: Revenue $8.7 $9.4 $11.0 $13.8 Loans Outstanding at year end 99 110 156 181 Commercial Loans: Revenue 3.0 3.8 5.9 8.0 Loans Outstanding at year end 41 55 109 108 - ---------------------------------------------------------------------- Automobile Dealer Business ($ in millions) 1996 1997 1998 1999 Loan Revenues $3.8 $6.4 $11.4 $16.3 Loans Outstanding at year end: Indirect Loans 58 106 165 215 Floor Plan Loans 1 7 23 18 Commercial Mortgages 4 6 16 28 Checking Deposits at year end 7 8 10 11 - ---------------------------------------------------------------------- Investment Management and Trust Services ($ in millions) 1996 1997 1998 1999 Department Income $.770 $.908 $1.048 $1.128 Discretionary Assets Under Management at year end 91 134 195 245 - ----------------------------------------------------------------------
15 Distribution. We distribute our products and services through a variety of convenient delivery channels. In addition to 12 traditional offices and a cadre of marketing officers, we have a proprietary network of 17 ATMs, are a member of the regional Agree/SM/ alliance with 243 ATMs which are offered to customers free of surcharge, belong to the Chicago regional Cash Station(R) network and the worldwide CIRRUS(R) system. We also operate a phone-banking system providing account information on a 24 hours-a-day, seven days-a-week basis. We offer retail and business Internet banking. Our Home Page offers general information, product information, valuable consumer data, investor relations pages and links to retail and business Internet applications. We have developed an Internet retail branch (www.obb.com) where a consumer can obtain On-Line home banking with a bill payment option, open deposit accounts and obtain consumer loans. We also operate a highly secure Internet site for business banking. When our Web Electronic Banking System ("W.E.B.S.(R)") was introduced in March, 1998, it was the first Internet-based business banking system in the Midwest. Commercial customers can look up balances and statements, see which checks have cleared and which are outstanding, transfer funds between accounts, initiate wires, issue stop payment orders and view checks online. Customization. We have a long history as an outstanding processing and successful service organization. More recently, we have developed a vibrant sales culture. While much of our past success can be traced to greater mass marketing and business-to-business calling efforts, we have recognized we must be more than a strong processing, service and sales organization. We have thus become customer-driven by encouraging our staff to tailor-make banking solutions--especially for business clients. Cash management, lending, and investment management are frequently "custom-made." Value-added, custom-made services help us differentiate ourselves from our competitors and, just as importantly, they inhibit "commoditizing" of our products. Product Innovation. Some examples of product innovation include: . Developing a complex custom system to process ten different taxes for a state taxing authority. . Handling the banking side of a customized state-wide program for the centralized collection and disbursement of child support payments. . Building a custom payment collection system for a large property management company. . Constructing an Internet delivery system to simplify access to remittance files for a Fortune 500 customer. . Producing a custom interface for payroll data for another large corporate customer. Competition While competition in financial services in the six-county Chicago Metropolitan area is robust and diverse, surprisingly there are only 6 banking companies with deposits in excess of $3 billion dollars. Beneath this group, there are approximately 20 more, ranging in size from about $650 million to approximately $3 billion in deposits, in the mid tier. With $894 million in deposits, we fit in this mid tier. 16 In fact, in DuPage County, the center of our western suburban market, we rank fifth in deposit market share among commercial banks, trailing only Bank One, Harris, West Suburban and Old Kent. We believe our increasing market visibility is resulting in more opportunities to bid on banking business, especially in the Chicago Market. Growth We operate in a growth mode in a large and expanding market. Even though acquiring such growth requires significant investments in people and infrastructure, core earnings year over year have been on the rise. Our growth is based largely on volume gains, more so than spread gains. The Chicago market is, in this sense, highly price competitive, but is large enough to present significant opportunities to grow volume and market share. By acting on those opportunities, our assets have risen to $1.15 billion in 1999.
- -------------------------------------------------- Growth ($ in millions) 1996 1997 1998 1999 Assets $ 769 $ 816 $1,009 $1,146 Loans 420 447 632 720 Deposits 648 628 778 894 Core Earnings 7.11 8.67 9.44 10.55 - --------------------------------------------------
High Asset Quality We have a sustained record of high asset quality and low levels of non- performing loans. It is a key company goal that we earn an above average return while taking less than average risk. This produces a predictable earnings stream and makes us a very understandable company. We believe this translates into a long-term advantageous risk/reward relationship. At year end, non-performing assets to total loans and other real estate owned equaled .05% compared to a nationwide peer group of banks (assets $1-2 billion) average of .83%. On a 3 year average, our ratio is .06% compared to peers' .92%. Net charge-offs for 1999 were .07% of average loans compared to peers' .30%. Net charge-offs based on a 3-year average are .16% compared to peers' .33%. It should be noted the 3-year average includes credit card charge-offs--a business sold in mid-1997 and one in which our charge-offs were never more than one-third the national average. Additionally, these outstanding results have been achieved during a period of significant loan growth--from $363 million at the end of 1995 to $720 million today. 17 Directors and Officers Corporate Executive Officer Directors* Eugene P. Heytow, Chairman of the Board and Chief Executive Officer Richard M. Rieser, Jr., President Frank M. Paris, Vice Chairman Corporate Non-Officer Directors* John W. Ballantine, Private Investor (formerly Executive Vice President and Chief Risk Management Officer, First Chicago NBD Corporation) Miriam Lutwak Fitzgerald, M.D. Stuart I. Greenbaum, Dean of Olin School of Business, Washington University Michael L. Stein, Executive Vice President and Director, Brownson, Rehmus, & Foxworth, Inc. (Financial counseling) Geoffrey R. Stone, Provost of the University of Chicago Robert M. Wrobel, President and CEO, Amalgamated Bank of Chicago Senior Corporate Officers Rosemarie Bouman, Vice President and Chief Financial Officer George C. Clam, Vice President and Chief Banking Officer William E. Navolio, Vice President, General Counsel, and Secretary Oak Brook Bank Directors Anthony DeSantis, Managing Partner, Drury Lane Theater & Complex Gary M. Fazzio, Senior Vice President, CB Richard Ellis, Inc. (Real estate brokerage services) Charles J. Gries (Advisory Director), Partner, Charles J. Gries & Company LLP (Certified Public Accountants) Thomas J. Hartigan, Vice President, Hartway Management, Inc. (Management and operation of multiple car dealerships) Andrew Heytow, President, Advantage Cutting & Gasket, Inc. Bruce Wechsler, President, Wexenthaller Realty Management, Inc. * These directors are also directors of the Oak Brook Bank - -------------------------------------------------------------------------------- Independent Auditors' Report The Board of Directors of First Oak Brook Bancshares, Inc.: We have audited, in accordance with generally accepted auditing standards, the consolidated balance sheets of First Oak Brook Bancshares, Inc. and subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the years then ended (not presented herein); and in our report dated January 21, 2000, we expressed an unqualified opinion on those consolidated financial statements. The consolidated financial statements of First Oak Brook Bancshares, Inc. and subsidiary for the year ended December 31, 1997 were audited by other auditors whose report thereon dated January 20, 1998, expressed an unqualified opinion on those statements. In our opinion, the information set forth in the accompanying condensed consolidated financial statements is fairly presented, in all material respects, in relation to the consolidated financial statements from which it has been derived. /s/ KPMG LLP Chicago, Illinois January 21, 2000 18 First Oak Brook Bancshares, Inc. - -------------------------------------------------------------------------------- Shareholder Information Stock Listing The Company's Common Stock trades on The Nasdaq Stock Market(R) under the symbol FOBB. As of January 31, 2000, there were 332 holders of record and approximately 1,464 beneficial shareholders. Corporate Office 1400 Sixteenth Street Oak Brook, Illinois 60523 (630) 571-1050 www.firstoakbrook.com email--rbouman@obb.com Annual Meeting The Annual Meeting of Shareholders will be held at 10 a.m. on Tuesday, May 2, 2000, in the Conference Center in our Corporate Office at 1400 Sixteenth Street, Oak Brook, Illinois 60523. Financial Information The Company's 1999 Form 10-K Annual Report and quarterly financial releases, as well as other Company information, can be accessed through our website on the Internet at www.firstoakbrook.com. Any individual requesting a printed copy of the Company's 1999 Form 10-K Annual Report filed with the Securities and Exchange Commission may obtain it without charge by writing to Rosemarie Bouman, Vice President and Chief Financial Officer, at the Corporate Office. Products and Services To receive information on our products and services, call us at 1-800-536-3000 or visit our Internet site at www.obb.com. Transfer Agent and Registrar For answers to questions about stock transfers, changes of address, dividend payments, or lost certificates, call our transfer agent, Oak Brook Bank, at (630) 571-1050 x255. Market Makers The following firms make a market in the Company's Common Stock. Those marked with an asterisk(*) also provide research coverage.
ABN AMRO, Inc.(*)................312-855-7600 First Union Securities (formerly Everen Securities)......................312-574-6000 Howe Barnes Investments, Inc.(*).............312-655-3000 Keefe, Bruyette & Woods, Inc.(*)...................212-323-8300 Mayer & Schweitzer, Inc..........212-804-3300 Sandler, O'Neill & Partners, L.P.(*)................312-795-1500 Stifel, Nicolaus & Co., Inc.(*)..314-342-2000
19 First Oak Brook Bancshares, Inc. 1400 Sixteenth Street, Oak Brook, IL 60523 www.firstoakbrook.com EX-21 3 SUBSIDIARIES OF THE REGISTRANT Exhibit (21) SUBSIDIARIES OF THE REGISTRANT The Company's subsidiary is incorporated in the State of Illinois and does business under its own name. OAK BROOK BANK (100%) EX-23.1 4 CONSENT OF INDEPENDENT AUDITOR EXHIBIT (23.1) CONSENT OF INDEPENDENT AUDITORS The Board of Directors First Oak Brook Bancshares, Inc.: We consent to incorporation by reference in the registration statements (No.'s 333-82800, 333-75025, 333-89647) on Form S-8 of First Oak Brook Bancshares, Inc., of our report dated January 21, 2000, relating to the consolidated balance sheets of First Oak Brook Bancshares, Inc. and subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the years then ended, which report appears in the December 31, 1999 annual report on Form 10-K of First Oak Brook Bancshares, Inc. /s/ KPMG LLP Chicago, Illinois March 27, 2000 EX-23.2 5 CONSENT OF INDEPENDENT AUDITOR (Exhibit (23.2) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-82800) pertaining to First Oak Brook Bancshares, Inc. 1987 Stock Option Plan, the Registration Statement (Form S-8 No. 333-75025) pertaining to First Oak Brook Bancshares, Inc. Amended and Restated 1987 Stock Option Plan and the Registration Statement (Form S-8 No. 333-89647) pertaining to First Oak Brook Bancshares, Inc. Directors Stock Plan of our report dated January 20, 1998, with respect to the consolidated financial statements of First Oak Brook Bancshares, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ ERNST & YOUNG LLP Chicago, Illinois March 27, 2000 EX-27 6 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS 12-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 DEC-31-1999 DEC-31-1998 47,080 41,759 488 11,402 0 362 0 0 254,182 156,421 94,425 141,253 93,202 143,980 719,969 631,987 4,828 4,445 1,146,356 1,009,275 894,072 777,802 98,008 87,268 11,277 9,644 63,000 57,500 0 0 0 0 14,567 14,567 65,432 62,494 1,146,356 1,009,275 50,078 40,811 17,863 18,015 1,519 2,870 69,460 61,696 29,841 27,029 37,123 33,286 32,337 28,410 840 630 79 79 25,640 22,423 14,823 13,348 14,823 13,348 0 0 0 0 10,546 9,441 1.60 1.42 1.57 1.39 3.35 3.43 90 0 282 272 0 0 0 0 4,445 4,329 528 729 71 215 4,828 4,445 4,828 4,445 0 0 0 0
EX-99 7 REPORT OF INDEPENDENT AUDITORS EXHIBIT (99) Report of Independent Auditors Board of Directors and Shareholders First Oak Brook Bancshares, Inc. We have audited the accompanying consolidated statements of income, changes in shareholders' equity, and cash flows of First Oak Brook Bancshares, Inc. and subsidiary for the year ended December 31, 1997. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of First Oak Brook Bancshares, Inc. and subsidiary's operations and cash flows for the year ended December 31, 1997, in conformity with accounting principles generally accepted in the United States. /s/ERNST & YOUNG LLP Chicago, Illinois January 20, 1998 -----END PRIVACY-ENHANCED MESSAGE-----