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UNITED STATES SECURITIES
AND
EXCHANGE COMMISSION
Washington, D.C. 20549
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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
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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
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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.
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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