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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, 2000
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 16, 2001, 6,337,505 shares of Common Stock were outstanding and
the aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately: $81,478,579 based upon the last sales price of
the registrant's Common Stock at $19.375 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 2001 Annual Meeting of Shareholders to be filed on or about
April 1, 2001 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 2001 Annual Meeting of
Shareholders to be held on May 8, 2001.
Page
Number
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PART I
Business and Statistical Disclosure by Bank Holding
Item 1 Companies................................................. 2
Item 2 Properties................................................ 5
Item 3 Legal Proceedings......................................... 6
Item 4 Submission of Matters to a Vote of Security Holders....... 6
PART II
Market for Registrant's Common Equity and Related
Item 5 Stockholder Matters....................................... 7
Item 6 Selected Financial Data................................... 8
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operation........................ 10
Quantitative and Qualitative Disclosures about Market
Item 7A Risks..................................................... 29
Item 8 Financial Statements and Supplementary Data............... 30
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 52
PART III
Item 10 Directors and Executive Officers of the Registrant........ 53
Item 11 Executive Compensation.................................... 53
Security Ownership of Certain Beneficial Owners and
Item 12 Management................................................ 53
Item 13 Certain Relationships and Related Transactions............ 53
PART IV
Exhibits, Financial Statement Schedules and Reports on
Item 14 Form 8-K.................................................. 54
Signatures........................................................... 56
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 four locations in Cook County. Another
branch is planned for the Will County city of Bolingbrook, Illinois. The
Company employs 304 full-time equivalent employees at December 31, 2000.
The Company has authorized 16,000,000 shares of Common Stock with a par
value of $2.00. As of December 31, 2000, the Company had total assets of
$1.249 billion, loans of $825.0 million, deposits of $978.2 million, and
shareholders' equity of $87.6 million.
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 commercial and retail banking business.
The services offered include demand, savings, and time deposits; corporate
cash management services; and commercial and consumer lending products. In
addition, related products and services are offered including merchant credit
card processing, safe deposit box operations, foreign currency sales and other
banking services. The Bank has a full service investment management and trust
department. In addition, the Bank operates an Internet Branch located at
www.obb.com which provides its commercial and retail 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, development and construction, commercial mortgages,
residential mortgages and home equity lines), indirect vehicle 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 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 and the type of
lien needed against collateral, insurance requirements, payment and maturity
terms, down payment requirements, debt-to-income ratio, credit history and
other matters of credit concern.
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 loan losses ("ALL") represents management's estimate of an
amount adequate to provide for probable 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
2
due and nonperforming loans, risk characteristics of the various types of
loans, current economic conditions, the fair value of underlying collateral,
historical losses experienced by the industry 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 June 2000, the Bank formed Oak Real Estate Development Corporation as a
wholly owned subsidiary of the Bank. This subsidiary was organized to 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 within the State of Illinois. Oak Real
Estate Development Corporation has a board of directors and officers
consisting of individuals who are currently directors and officers of the
Company or the Bank. The subsidiary's first project, now underway, is a gut
rehab of a 90 year old row house in a neighborhood just west of the United
Center in Chicago, Illinois.
Competition
The Company and its subsidiary bank serve Chicagoland from nine offices in
DuPage County, Illinois, and four offices in Cook County, Illinois, including
its newest branch, opened in November 2000, at the corner of Huron and
Dearborn Streets in Chicago, Illinois.
At June 30, 2000, the Company had an approximate 6.3% market share in
relation to the total deposits in DuPage County commercial banks and an
approximate .1% market share of total deposits in Cook County commercial
banks. 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, 2000, had $164.7 billion in deposits.
The Bank is located in a highly competitive market facing competition for
banking and related 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. Competition is generally expressed in
terms of interest rates charged on loans and paid on deposits, the ability to
attract new deposits, the type of services offered, extended banking hours,
access to bank services through branches and the internet, and the offering of
additional financial services.
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 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 and assessments, 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).
3
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, 2000, 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 exceeded
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, 2001 the FDIC
Assessment Rate Schedule for BIF members ranged from zero for "well
capitalized" institutions to $.27 per $100 of deposits for "undercapitalized"
institutions.
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.
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 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.
4
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 promptly to 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 of 1999 (GLB Act)
The GLB 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 GLB 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. Regulations being issued under the Act by the Federal
Reserve Board and other functional regulatory agencies will have a significant
impact on the implementation and scope of the Act as it relates to bank
holding companies that elect to become a FHC.
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.
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 space from Oak Brook Bank.
The Bank and its branches conduct business in both owned and leased premises.
At December 31, 2000 the Bank operated from seven owned and six 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.
5
In March 2001, the Bank closed on the purchase of property in Bolingbrook,
Illinois. The Bank will be constructing its 14th location on this site.
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, 2000. 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 2000.
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, 2001, there were 315 holders of record and
approximately 1,700 beneficial shareholders. See Item 8 under Notes 8, 10 and
12 to the consolidated financial statements for additional shareholder
information.
Stock Data(/1/)
Per Share
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Diluted
Net Dividends Book Low High Quarter
Quarter Ended Income Paid Value Price(/2/) Price(/2/) End Price
- ------------- ------- --------- ------ ---------- ---------- ---------
December 31, 2000....... $.48 $.11 $13.63 $14.69 $18.00 $17.63
September 30, 2000...... .42 .11 12.93 13.50 15.56 15.56
June 30, 2000........... .41 .11 12.44 13.63 17.00 13.63
March 31, 2000.......... .39 .10 12.14 14.94 18.38 15.63
December 31, 1999....... .41 .10 12.04 18.00 19.38 18.50
September 30, 1999...... .40 .10 12.04 18.69 21.00 18.75
June 30, 1999........... .39 .10 11.70 16.50 21.00 20.13
March 31, 1999.......... .37 .10 11.76 17.44 19.00 17.44
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(/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, 2000 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,
--------------------------------------------------------------
2000 1999 1998 1997 1996
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(Dollars in thousands except per share data)
Statement of Income Data
Net interest income..... $ 33,205 $ 32,337 $ 28,410 $ 27,432 $ 26,834
Provision for loan
losses................. 900 840 630 1,550 1,510
Net interest income
after provision for
loan losses............ 32,305 31,497 27,780 25,882 25,324
Other income............ 10,482 8,966 7,991 15,541(/1/) 4,647
Other expenses.......... 27,117 25,640 22,423 20,708 20,435
Income before provision
for income taxes....... 15,670 14,823 13,348 20,715 9,536
Provision for income
taxes.................. 4,621 4,277 3,907 6,962 2,429
Net income.............. $ 11,049 $ 10,546 $ 9,441 $ 13,753 $ 7,107
Common Stock Data(/2/)
Basic earnings per
share.................. $ 1.72 $ 1.60 $ 1.42 $ 2.09 $ 1.06
Diluted earnings per
share.................. 1.70 1.57 1.39 2.03 1.03
Cash dividends paid per
share(/3/)............. .43 .40 .345 .270 .190
Book value per share.... 13.63 12.04 11.46 10.38 8.62
Closing price of Common
Stock per share(/3/)...
High.................. 18.38 21.00 25.50 25.19 12.75
Low................... 13.50 16.50 17.75 11.38 10.25
Year-End.............. 17.63 18.50 18.50 24.00 11.63
Dividends per share to
closing price.......... 2.4% 2.2% 1.9% 1.1% 1.6%
Closing price to diluted
earnings per share..... 10.4x 11.8x 13.3x 11.8x 11.3x
Market capitalization... $ 111,875 $ 120,829 $ 121,783 $ 160,477 $ 78,458
Period end shares
outstanding............ 6,345,745 6,531,314 6,582,840 6,686,560 6,746,186
Volume of shares
traded................. 2,512,886 1,656,449 1,908,594 3,447,438 1,133,042
Year-End Balance Sheet
Data
Total assets............ $1,249,272 $1,146,356 $1,009,275 $ 816,144 $ 768,655
Loans, net of unearned
discount............... 825,020 719,969 631,987 447,332 420,164
Allowance for loan
losses................. 5,682 4,828 4,445 4,329 4,109
Investment securities... 319,985 348,607 297,674 302,098 265,954
Demand deposits......... 221,552 196,243 187,209 153,806 147,497
Total deposits.......... 978,226 894,072 777,802 627,763 648,303
Federal Home Loan Bank
borrowings............. 81,000 63,000 57,500 42,500 --
Trust Preferred Capital
Securities............. 6,000 -- -- -- --
Shareholders' equity.... 87,606 79,999 77,061 71,661 59,553
8
At and for the years ended December 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(Dollars in thousands except per share data)
Financial Ratios
Return on average
assets................. .90% .99% 1.02% 1.76% .97%
Return on average
equity................. 13.58 13.30 12.74 21.72 12.77
Net interest margin..... 2.99 3.35 3.43 3.97 4.20
Net interest spread..... 1.95 2.35 2.34 2.86 3.23
Dividend payout ratio... 25.45 24.62 24.17 12.43 18.63
Capital Ratios
Average equity to
average total assets... 6.63% 7.41% 8.00% 8.11% 7.59%
Tier 1 capital ratio.... 9.75 10.05 10.20 13.70 12.66
Total capital ratio..... 10.35 10.65 10.80 14.55 13.54
Capital leverage ratio.. 7.47 7.12 7.61 8.57 7.69
Asset Quality Ratios
Nonperforming loans to
total loans............ .05% .05% .04% .09% .49%
Nonperforming assets to
total loans and other
real estate owned...... .05 .05 .04 .09 .49
Nonperforming assets to
total capital.......... .50 .47 .35 .53 3.49
Allowance for loan
losses to total loans.. .69 .67 .70 .97 .98
Net charge-offs to
average loans.......... .01 .07 .10 .32 .34
Allowance for loan
losses to nonperforming
loans.................. 12.94x 12.98x 16.34x 11.45x 1.98x
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(/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, 2000, 1999 and 1998. 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 were $1.25 billion, up 9% from total assets of $1.15
billion at December 31, 1999. Increased marketing efforts and competitive
pricing contributed to the continued strong asset growth.
Total equity reached a record level of $87.6 million at December 31, 2000 an
increase of 10% over prior year total equity of $80 million. The Company's
capital ratios continued to exceed the minimum regulatory guidelines and the
subsidiary bank's capital ratios exceeded 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 2000, 1999 and 1998 were as follows:
2000 1999 1998
----------- ----------- ----------
Net income................................ $11,049,000 $10,546,000 $9,441,000
Basic earnings per share.................. $ 1.72 $ 1.60 $ 1.42
Diluted earnings per share................ $ 1.70 $ 1.57 $ 1.39
Return on average assets.................. .90% .99% 1.02%
Return on average equity.................. 13.58% 13.30% 12.74%
2000 versus 1999
The 2000 results compared to 1999 include the following significant pre-tax
components:
. Net interest income rose $868,000 due to a 15% increase in average
earning assets, primarily loans, offset by a 11% decrease in the net
interest margin.
. Other income, increased $1,516,000 primarily due to an increase in fee
income from cash management and merchant credit card processing.
. Other expenses increased $1,477,000 primarily due to additions to staff
and compensation increases, higher occupancy and equipment expenses
related to new branches in LaGrange (opened September 1999) and Chicago
(opened November 2000) and merchant credit card interchange expense.
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).
10
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.
2000 versus 1999
On a tax-equivalent basis, net interest income for 2000 totaled $34,546,000,
an increase of 3% over 1999. This increase is attributable to a 15% increase
in average earning assets offset by a 36 basis point decrease in the net
interest margin to 2.99% in 2000 from 3.35% in 1999. The increase in net
interest income and the compression of the net interest margin was primarily
the result of the following:
. During 2000, average loans increased $102 million primarily in the
indirect ($34 million), commercial real estate ($32 million), home
equity ($16 million), commercial ($14 million) and residential real
estate ($7 million) loan portfolios. The increase in volume was
complemented by a 35 basis point increase in rates, primarily due to the
growth in commercial, commercial real estate and home equity loans. See
"Loans" for further details of yields by loan type.
. The Company also increased its average portfolio of securities by $47
million primarily in the U.S. Government Agency Securities (up $62
million). As funds were received on maturities, calls and paydowns, the
proceeds were re-directed into the higher-yielding agency portfolio or
used to fund the higher-yielding loan demand.
. Due to the rising interest rate environment, the average yield on
earning assets increased 36 basis points as compared to the average cost
on liabilities increasing 76 basis points. The Fed raised interest rates
three times during 2000 (and once late in 1999) and since the Company's
liabilities tend to reprice more quickly than its assets, the margin was
squeezed.
. Higher rate time deposits increased $89 million and money market
accounts increased $44 million, while lower rate savings and NOW
accounts decreased by $33 million. To fund the loan growth, the Company
ran successful retail deposit promotions during the year. In addition,
short-term debt increased primarily due to Treasury, Tax and Loan
deposits.
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 ($57 million), commercial real estate ($46 million), commercial
($31 million), residential real estate ($14 million) and home equity ($9
million) portfolios. The increase in volume was partially offset by a 42
basis point decrease in the average yield on the loan portfolio.
Compression of 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 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.
11
The following table presents the average interest rate on each major
category of interest-earning assets and interest-bearing liabilities for 2000,
1999, and 1998.
Average Balances and Effective Interest Rates
2000 1999 1998
--------------------------- --------------------------- -------------------------
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................ $ 29,124 $ 1,821 6.26% $ 22,267 $ 1,118 5.02% $ 38,904 $ 2,106 5.41%
Interest-bearing
deposits with banks... 231 14 5.96 5,862 401 6.84 11,230 764 6.81
Taxable securities..... 292,123 19,067 6.53 246,524 15,136 6.14 240,674 15,489 6.44
Tax exempt
securities(/1/)....... 54,474 3,998 7.34 52,668 3,850 7.31 50,197 3,567 7.11
Loans, net of unearned
discount(/1/),(/2/)... 778,274 60,624 7.79 675,932 50,261 7.44 521,072 40,949 7.86
---------- ------- ----- ---------- ------- ---- -------- ------- ----
Total earning assets/
interest income........ $1,154,226 $85,524 7.41% $1,003,253 $70,766 7.05% $862,077 $62,875 7.29%
Cash and due from
banks.................. 42,184 39,867 40,081
Other assets............ 35,417 31,236 28,379
Allowance for loan
losses................. (5,282) (4,576) (4,092)
---------- ---------- --------
$1,226,545 $1,069,780 $926,445
========== ========== ========
Liabilities and
Shareholders' Equity
Interest-bearing
liabilities:
Savings and NOW
accounts............... $ 139,014 $ 4,201 3.02% $ 172,452 $ 4,765 2.76% $171,067 $ 5,711 3.34%
Money market accounts.. 92,581 4,400 4.75 48,112 1,648 3.43 40,139 1,302 3.24
Time deposits.......... 520,297 31,465 6.05 431,150 23,428 5.43 346,807 20,016 5.77
Short-term debt........ 109,053 6,424 5.89 71,828 3,412 4.75 59,110 3,014 5.10
FHLB borrowings........ 71,715 4,286 5.98 66,922 3,870 5.78 55,917 3,243 5.80
Trust Preferred Capital
Securities............ 1,902 202 10.62 -- -- -- -- -- --
---------- ------- ----- ---------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities/interest
expense............... $ 934,562 $50,978 5.46% $ 790,464 $37,123 4.70% $673,040 $33,286 4.95%
Demand deposits......... 199,753 189,448 170,146
Other liabilities....... 10,894 10,556 9,159
---------- ---------- --------
Total liabilities....... $1,145,209 $ 990,468 $852,345
Shareholders' equity.... 81,336 79,312 74,100
---------- ---------- --------
$1,226,545 $1,069,780 $926,445
========== ========== ========
Net interest income/ net
interest spread(/3/)... $34,546 1.95% $33,643 2.35% $29,589 2.34%
Net interest
margin(/4/)............ 2.99% 3.35% 3.43%
- --------
(/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 2000, 1999 and 1998.
(/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.
12
The following table presents a summary analysis of changes in interest
income and interest expense for 2000 as compared to 1999 and 1999 as compared
to 1998. Interest income rose in 2000 primarily due to the increase in the
average volume and average yield in the loan portfolio. Interest expense
increased primarily due to an increase in the average volume and rates paid
for money market, time deposits and short term borrowings. 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.
Analysis of Net Interest Income Changes
2000 Over 1999 1999 Over 1998
----------------------------- ----------------------------
Volume(/1/) Rate(/1/) Total Volume(/1/) Rate(/1/) Total
----------- --------- ------- ----------- --------- ------
(Dollars in thousands)
Increase (decrease) in
interest income:
Federal funds sold...... $ 391 $ 312 $ 703 $ (844) $ (144) $ (988)
Interest-bearing
deposits with banks.... (342) (45) (387) (366) 3 (363)
Taxable securities...... 3,221 710 3,931 370 (723) (353)
Tax exempt
securities(/2/)........ 132 16 148 179 104 283
Loans, net of unearned
discount(/2/),(/3/).... 7,943 2,420 10,363 11,616 (2,304) 9,312
------- ------- ------- ------- ------- ------
Total interest income... $11,345 $ 3,413 $14,758 $10,955 $(3,064) $7,891
------- ------- ------- ------- ------- ------
Increase (decrease) in
interest expense:
Savings & NOW accounts.. $(1,098) $ 534 $ (564) $ 46 $ (992) $ (946)
Money market accounts... 1,939 813 2,752 270 76 346
Time deposits........... 5,198 2,839 8,037 4,638 (1,226) 3,412
Short-term debt......... 2,058 954 3,012 615 (217) 398
FHLB borrowings......... 284 132 416 636 (9) 627
Trust Preferred Capital
Securities............. 202 -- 202 -- -- --
------- ------- ------- ------- ------- ------
Total interest expense.. $ 8,583 $ 5,272 $13,855 $ 6,205 $(2,368) $3,837
------- ------- ------- ------- ------- ------
Increase (decrease) in
net interest income.... $ 2,762 $(1,859) $ 903 $ 4,750 $ (696) $4,054
======= ======= ======= ======= ======= ======
- --------
(/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 2000,
1999 and 1998.
(/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,
historical losses experienced by the industry 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
13
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 vehicle
and consumer loans, are collectively evaluated for impairment and not subject
to impaired loan disclosure. 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
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(Dollars in thousands)
Average loans for the year,
net of unearned discount and
allowance for loan losses... $772,992 $671,356 $516,980 $412,327 $388,433
-------- -------- -------- -------- --------
Allowance for loan losses,
beginning of the year....... $ 4,828 $ 4,445 $ 4,329 $ 4,109 $ 3,932
Charge-offs during the year:
Real estate-construction... -- -- -- (200) --
Real estate mortgage and
home equity loans......... -- (1) -- (20) --
Commercial loans........... (40) (357) -- -- --
Indirect loans............. (150) (130) (31) (39) (14)
Credit card loans.......... (6) (32) (188) (1,237) (1,484)
Overdraft loans............ (4) (4) (458) (4) (11)
Consumer loans............. (10) (4) (52) (5) (2)
-------- -------- -------- -------- --------
Total charge-offs........ (210) (528) (729) (1,505) (1,511)
-------- -------- -------- -------- --------
Recoveries during the year:
Real estate mortgage and
home equity loans......... -- 1 -- -- --
Commercial loans........... 75 4 11 1 33
Indirect loans............. 32 5 20 8 11
Credit card loans.......... 56 61 181 166 126
Overdraft loans............ 1 -- 1 -- --
Consumer loans............. -- -- 2 -- 8
-------- -------- -------- -------- --------
Total recoveries......... 164 71 215 175 178
-------- -------- -------- -------- --------
Net charge-offs during the
year........................ (46) (457) (514) (1,330) (1,333)
Provision for loan losses.... 900 840 630 1,550 1,510
-------- -------- -------- -------- --------
Allowance for loan losses,
end of the year............. $ 5,682 $ 4,828 $ 4,445 $ 4,329 $ 4,109
======== ======== ======== ======== ========
Ratio of net charge-offs to
average loans outstanding... .01% .07% .10% .32% .34%
Allowance for loan losses as
a percent of loans
outstanding, net of unearned
discount at end of the
year........................ .69% .67% .70% .97% .98%
Ratio of allowance for loan
losses to nonperforming
loans....................... 12.94x 12.98x 16.34x 11.45x 1.98x
The provision for loan losses increased $60,000 in 2000 as compared to 1999,
and $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
15% and 30% in 2000 and 1999, respectively, the Company has continued to have
low levels of nonperforming loans and net charge-offs.
14
Currently and historically, the Company has maintained high asset quality.
Net charge-offs for 2000 totaled $46,000 or .01% of average loans.
The Company's allowance for loan losses as a percent of loans outstanding
was .69% at December 31, 2000 as compared to .67% in 1999 and .70% in 1998.
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. 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 credit review 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 judgments about information available to them at the time of their
examination.
15
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,
--------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(Dollars in thousands)
Allocation of allowance for loan
losses:
Real estate--commercial;
construction, land acquisition and
development loans................... $ 293 $ 313 $ 116 $ 70 $ 634
Real estate--residential mortgage and
home equity loans................... 173 126 120 65 57
Commercial loans..................... 769 428 523 123 98
Indirect loans....................... 1,104 793 496 105 178
Consumer loans....................... 53 35 30 24 45
Credit card loans.................... 29 85 213 287 2,404
Unallocated.......................... 3,261 3,048 2,947 3,655 693
------ ------ ------ ------ ------
Total allowance.................... $5,682 $4,828 $4,445 $4,329 $4,109
====== ====== ====== ====== ======
Percentage of loans to gross loans:
Real estate--commercial;
construction, land acquisition and
development loans................... 27.6% 25.1% 24.7% 24.6% 23.6%
Real estate--residential mortgage and
home equity loans................... 27.9 28.5 30.1 36.2 35.4
Commercial loans..................... 16.5 14.9 17.2 12.2 9.7
Indirect loans....................... 26.6 29.9 26.1 23.7 13.9
Consumer loans....................... 1.4 1.6 1.9 3.2 3.6
Credit card loans.................... -- -- -- 0.1 13.8
------ ------ ------ ------ ------
100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
Nonperforming Assets
The accrual of interest is discontinued on commercial, real estate and
indirect 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,
--------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(Dollars in thousands)
Nonaccruing loans...................... $ 121 $ 90 $ -- $ -- $1,730
Loans which are past due 90 days or
more.................................. 318 282 272 378 349
------ ------ ------ ------ ------
Total nonperforming loans............ 439 372 272 378 2,079
Other real estate owned................ -- -- -- -- --
------ ------ ------ ------ ------
Total nonperforming assets........... $ 439 $ 372 $ 272 $ 378 $2,079
------ ------ ------ ------ ------
Nonperforming loans to total loans
outstanding........................... .05% .05% .04% .09% .49%
Nonperforming assets to total loans
outstanding and other
real estate owned..................... .05% .05% .04% .09% .49%
Nonperforming assets to total assets... .04% .03% .03% .05% .27%
Nonperforming assets to total capital.. .50% .47% .35% .53% 3.49%
16
Summary of Other Income
The following table summarizes significant components of other income and
percentage changes from year to year:
% Change
---------------
2000 1999 1998 '00-'99 '99-'98
------- ------ ------ ------- -------
(Dollars in thousands)
Service charges on deposit accounts..... $ 4,671 $3,600 $3,190 30% 13%
Investment management and trust fees.... 1,144 1,128 1,048 1 8
Merchant credit card processing fees.... 2,552 1,858 1,329 37 40
Fees on mortgages sold, net............. 177 422 416 (58) 1
Income from revenue sharing agreement... 900 900 900 -- --
Other operating income.................. 1,020 979 1,029 4 (5)
Investment securities gains, net of
losses................................. 18 79 79 (77) --
------- ------ ------ --- ---
Total................................... $10,482 $8,966 $7,991 17% 12%
======= ====== ====== === ===
2000 versus 1999
Service charges on deposit accounts increased $1,071,000 primarily due to an
increase in cash management fees. These fees increased due to new customer
volume including one very significant customer added late in 1999, which
resulted in a full year of fees in 2000 as compared to two months of fees in
1999. In addition to cash management fees, retail fee income also increased
primarily due to higher fees for online banking, debit card and ATM usage.
Investment management and trust department income increased $16,000,
primarily due to an increase in assets under investment management and other
new trust business offset by decreases in the equity market which affect the
trust fees earned on accounts. Total discretionary assets under investment
management were $271 million at December 31, 2000 compared to $245 million at
December 31, 1999.
Merchant credit card processing fees increased $694,000 primarily due to new
merchant accounts and increased volume. The number of merchants serviced
increased to 298 at year-end 2000 from 262 at year-end 1999. Merchant
interchange expense (in the Other Expense section) rose $523,000 in 2000.
Fees on mortgages sold, servicing released, decreased $245,000 due to a weak
mortgage market in 2000. Loans originated for sale in 2000 were $15.8 million
as compared to $36.2 million in 1999. As the interest rates were rising late
in 1999 and throughout 2000, the mortgage refinance market slowed down
significantly. This fee income for 2000 represents the gain on mortgages sold
of $264,000 net of $87,000 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
2000 and 1999. 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.
The net gain recognized on securities sold was $18,000 in 2000. Included in
gross gains of $388,000 was a gain of $254,000 from the revaluation of stock
received in the exchange of the Company's privately-held shares of Cash
Station, Inc. for publicly-traded shares of Concord EFS, Inc.. The gross loss
of $370,000 includes a loss of $275,000 from the sale of $17 million in low-
yielding investment securities that was primarily invested in higher-yielding
government agency securities.
1999 versus 1998
Service charges on deposit accounts increased $410,000 primarily due to an
increase in business account analysis fees.
17
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.
Summary of Other Expenses
The following table summarizes significant components of other expenses and
percentage changes from year to year:
% Change
---------------
2000 1999 1998 '00-'99 '99-'98
------- ------- ------- ------- -------
(Dollars in thousands)
Salaries and employee benefits........ $16,171 $15,817 $13,680 2% 16%
Occupancy expense..................... 1,797 1,683 1,566 7 7
Equipment expense..................... 2,011 1,824 1,906 10 (4)
Data processing....................... 1,028 968 776 6 25
Professional fees..................... 585 576 522 2 10
Postage, stationery and supplies...... 869 865 834 -- 4
Advertising and business development.. 1,356 1,231 1,090 10 13
Merchant credit card interchange
expense.............................. 1,942 1,419 994 37 43
FDIC assessment....................... 184 92 81 100 14
Other operating expenses.............. 1,174 1,165 974 1 20
------- ------- ------- --- ---
Total................................. $27,117 $25,640 $22,423 6% 14%
======= ======= ======= === ===
2000 versus 1999
Other expenses rose $1,477,000 or 6% in 2000 over 1999. Other expenses as a
percentage of average assets improved to 2.2% for 2000 as compared to 2.4% for
1999. Net overhead expenses as a percentage of average earning assets improved
to 1.4% from 1.7% and the efficiency ratio (other expenses to net interest
income and other income) remained constant at 62.1% for both years.
Salaries and employee benefits increased $354,000 or 2% over 1999. The
increase was due to normal salary and benefit increases and higher
compensation due to competitive market conditions. The increase in salaries is
partially offset by a decrease in executive performance based compensation.
Occupancy and equipment expenses increased $301,000 or 9% over 1999 due
primarily to the opening of the new branches in LaGrange (September 1999) and
Chicago (November 2000).
18
Advertising and business development fees increased $125,000 over 1999 due
primarily to an extensive advertising and public relations campaign to
publicize the capabilities of the investment management and trust department
and retail advertising and promotions related to the opening of the new
Chicago branch.
Merchant credit card interchange expense increased $523,000 due to new
merchant accounts and increased volume. Merchant credit card processing fees
(in other income) rose $694,000 in 2000.
FDIC assessments increased $92,000 due to a new assessment on all banks to
help service the Financial Corporation's (FICO) bond obligations. This
assessment on banks now equals that on savings institutions.
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 executive 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 increased $35,000 primarily due to the new
LaGrange office and a full year of operations at the Glen Ellyn office. 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 testing of the Company's
operating systems for compliance with the Year 2000 date change.
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 credit card interchange expense increased $425,000 due to new
merchants and increased interchange fees. Merchant credit 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.
Income Tax Expense
Income taxes for 2000 totaled $4,621,000 as compared to $4,277,000 for 1999
and $3,907,000 in 1998. When measured as a percentage of income before income
taxes, the Company's effective tax rate remained consistent at 29% for 2000,
1999 and 1998.
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
stock repurchase programs.
19
The Company has numerous sources of liquidity including a portfolio of
shorter-term loans, readily marketable investment securities, the ability to
attract consumer time deposits and access to various borrowing arrangements.
Available borrowing arrangements are summarized as follows:
Subsidiary Bank:
. Informal Federal funds lines aggregating $123 million with seven
correspondent banks, subject to continued good financial standing.
As of December 31, 2000, all $123 million was available for use
under these lines.
. Reverse repurchase agreement lines with three brokerage firms are
available based on the pledge of specific collateral and continued
good financial standing of the Bank. As of December 31, 2000,
approximately $58 million was available to the Bank under these
lines.
. 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, 2000, approximately $10 million remains available
to the Bank under the FHLB agreements.
. A borrowing line of approximately $152 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, 2000,
the line was unused and matures on March 31, 2001. It is anticipated
to be renewed annually.
. Cash, short-term investments and other marketable securities
totaling $4.1 million at December 31, 2000.
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 and rate competition for
deposits. 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 changes on indeterminate maturity deposit products
(savings, money market, NOW and demand deposits) for a given level of market
rate changes. Additionally, changes in prepayment behavior of loans and
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,
20
2000 and 1999 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.
2000 1999
---------------- ----------------
-200 bp +200 bp -200 bp +200 bp
------- ------- ------- -------
(dollars in thousands)
Annual interest income change from an
immediate change in rates.............. $2,269 $(2,115) $1,856 $(2,562)
Percent change.......................... 6.0% (5.6)% 5.4% (7.4)%
The table below presents a static gap analysis as of December 31, 2000 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.. $ 15,759 $ -- $ -- $ -- $ 15,759
Taxable securities.... 49,740 18,646 24,830 174,892 268,108
Tax exempt
securities........... 475 250 2,265 48,887 51,877
Loans, net of unearned
discount............. 287,287 41,047 84,334 412,352 825,020
--------- --------- --------- ---------- ----------
Total............... $ 353,261 $ 59,943 $ 111,429 $ 636,131 $1,160,764
--------- --------- --------- ---------- ----------
Cumulative total.... $ 353,261 $ 413,204 $ 524,633 $1,160,764
--------- --------- --------- ----------
Rate sensitive
liabilities:
Savings and NOW
accounts............. $ 130,602 $ -- $ -- $ -- $ 130,602
Money market
accounts............. 111,761 -- -- -- 111,761
Time deposits......... 163,136 117,035 157,498 76,642 514,311
Borrowings............ 58,488 969 -- 111,250 170,707
--------- --------- --------- ---------- ----------
Total............... $ 463,987 $ 118,004 $ 157,498 $ 187,892 $ 927,381
--------- --------- --------- ---------- ----------
Cumulative total.... $ 463,987 $ 581,991 $ 739,489 $ 927,381
--------- --------- --------- ----------
Cumulative gap.......... $(110,726) $(168,787) $(214,856) $ 233,383
--------- --------- --------- ----------
Cumulative gap to total
assets ratio........... (8.86)% (13.51)% (17.20)% 18.68%
--------- --------- --------- ----------
Investment Securities
The Company's investment portfolio decreased $28.6 million or 8% during 2000
to $320.0 million at year-end from $348.6 million at year-end 1999. This
decrease is partially due to redirecting proceeds received from security
maturities, calls and paydowns to fund the higher-yielding loan demand. In
purchasing securities, 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.
U.S. Treasury Securities: The Company decreased its holdings of U.S.
Treasuries by $30.5 million to $26.8 million at year-end from $57.3 million at
year-end 1999. The decrease was primarily due to the sale of $17.3 million in
low yielding treasury securities that were reinvested in higher-yielding U.S.
Government Agency Securities. The average maturity of the U.S. Treasury
portfolio decreased to 1.7 years in 2000 from 1.9 years in 1999.
21
U.S. Government Agency and Mortgage Backed Securities: The U.S. Government
agency securities (including agency mortgage backed securities and agency
collateralized mortgage obligations) portfolio increased $800,000 in 2000 to
$225.6 million at year-end from $224.8 million at year-end 1999. The slight
increase was primarily due to the reinvestment of maturing securities into
this higher-yielding security. The average maturity of this sector of the
portfolio remained at 3.8 years in both 2000 and 1999.
Municipal Securities: The Company's municipal security holdings decreased
$1.3 million to $53.8 million at year-end from $55.1 million at year-end 1999.
Due to their Federally tax-exempt status, low credit risk, and pledgability
for 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 decreased slightly to 5.5 years
in 2000 from 5.9 years in 1999.
Corporate and Other Securities: Holdings of corporate and other securities
increased $2.3 million to $13.7 million in 2000 from $11.4 million in 1999.
The increase consisted primarily of purchases of long-term corporate debt
securities offset by the sale of equity securities at the parent company
level. At December 31, 2000, the portfolio consists primarily of $7.3 million
in corporate debt securities and $5.6 million of Federal Home Loan Bank stock.
1999
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. This
increase in 1999 was primarily in state income tax exempt U.S. Government
agency securities offset by the maturity of short-term corporate securities
purchased late in 1998.
The following table sets forth the carrying values of investment securities
held on the dates indicated.
Investments by Type (at carrying value)
December 31,
--------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
U.S. Treasury....................................... $ 26,840 $ 57,285 $ 50,403
U.S. Government agencies............................ 212,916 206,325 102,797
Agency mortgage-backed securities................... 11,861 15,931 19,683
Agency collateralized mortgage obligations.......... 807 2,536 15,310
State and municipal................................. 53,850 55,139 56,036
Corporate and other securities...................... 13,711 11,391 53,445
-------- -------- --------
Total investment portfolio.......................... $319,985 $348,607 $297,674
======== ======== ========
At December 31, 2000 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.
22
The maturity distribution and weighted average yield of investment
securities at December 31, 2000 are presented in the following table:
Analysis of Investment Portfolio
U.S. State and
U.S. Treasury 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.............. $10,117 4.74% $ 42,774 5.83% $ 3,503 8.00% $ -- --
1-5 years.................. 16,723 5.93 89,858 6.45 24,184 7.89 -- --
5-10 years................. -- -- 92,952 7.30 24,253 7.78 1,478 7.98
After 10 years -- -- -- -- 1,910 8.53 12,233(/3/) 8.42
------- ---- -------- ---- ------- ---- --------- ------
$26,840 5.48% $225,584 6.68% $53,850 7.87% $ 13,711 8.37%
======= ==== ======== ==== ======= ==== ========= ======
Average months to maturity.. 20 45 66 304
- --------
(/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, 2000. 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 the Federal Home Loan
Bank of Chicago stock, which have no maturity date and are not included in
the average months to maturity.
Loans
2000
At year-end 2000, loans outstanding, net of unearned discount, increased
$105.1 million or 15% compared to 1999. Commercial, commercial real estate and
home equity loans led 2000 loan growth. In addition, the residential mortgage
and indirect loan portfolios posted increases.
Commercial loans increased $28.8 million or 27% to $136.3 million in 2000.
This increase was primarily due to additional marketing efforts, new large
participations in nationally syndicated loans in other areas of the country
and competitive pricing.
Construction, land acquisition and development loans increased $23.5 million
or 104% to $46.1 million and commercial mortgage loans increased $23.4 million
or 15% to $181.4 million in 2000. These increases are primarily due to
increased marketing in the Chicago area and competitive loan pricing.
Home equity loans increased $17.5 million or 21% to $102.8 million due
primarily to successful mass marketing efforts and increased usage on existing
lines.
Residential mortgage loans increased $7.6 million or 6% due to lower payoffs
on our existing portfolio due to rising interest rates. In 2000, the Company
originated approximately $40 million in new residential real estate loans of
which $24 million were retained in the portfolio and $16 million were sold to
investors.
Indirect loans increased $4.0 million or 2% to $219.3 million in 2000. This
modest increase was intentional. The interest rate environment was such that
the capital needed to support these lower yielding loans could be better
utilized in higher-yielding commercial loans. Included in the indirect loans
are $5.4 million in Harley Davidson motorcycle loans that have been originated
as part of a national marketing initiative. The Company does not have any
programs to buy subprime indirect loan paper.
There were no loan concentrations exceeding 10% of total loans at December
31, 2000, which were not otherwise disclosed.
23
1999
At year-end 1999, loans outstanding, net of unearned discount, increased
$88.0 million or 14% compared to 1998. Indirect loans, commercial real estate
and home equity loans led the 1999 loan growth.
Indirect 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 did not have any programs to buy subprime indirect
loan 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.
Loans by Type
December 31,
--------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(Dollars in thousands)
Commercial loans.................. $136,314 $107,557 $108,685 $ 54,658 $ 40,895
Real estate loans--
Construction, land acquisition
and development loans.......... 46,082 22,566 41,640 36,525 35,902
Commercial mortgage loans....... 181,380 158,008 114,373 73,376 63,394
Residential mortgage loans...... 127,794 120,191 117,438 96,766 93,730
Home equity loans............... 102,841 85,343 73,149 65,273 55,297
Indirect loans(/1/)............... 219,348 215,364 165,341 105,807 58,578
Consumer loans(/2/) .............. 11,370 11,189 11,780 14,932 14,993
Credit card loans................. 29 85 213 631 58,114
-------- -------- -------- -------- --------
$825,158 $720,303 $632,619 $447,968 $420,903
Less:
Unearned discount............... 138 334 632 636 739
Allowance for loan losses....... 5,682 4,828 4,445 4,329 4,109
-------- -------- -------- -------- --------
Loans, net...................... $819,338 $715,141 $627,542 $443,003 $416,055
-------- -------- -------- -------- --------
- --------
(/1/Indirect)loans represent consumer loans made through a network of new car
and motorcycle 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 home equity loans are secured
primarily by junior liens on one-to-four family residences in the Chicago
Metropolitan area. 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 for residential mortgage loans and eighty five percent of the
appraised value for home equity loans. Commercial mortgages and construction,
land acquisition and development loans are
24
generally secured by properties in the Chicago Metropolitan area. In 2000 the
Bank began to participate in some larger nationally syndicated loans on
properties outside of the Chicago area; however, there is no concentration of
these loans in any other region of the United States.
Average loans for 2000 were $778.3 million, an increase of $102.4 million or
15% as compared to 1999. As shown in the following table, the increase is
primarily in commercial, commercial mortgage, home equity and indirect loans.
Average loans for 1999 increased to $675.9 million, an increase of $154.8
million or 30% over the 1998 average.
Average Loans and Yield by Type
2000 1999 1998
-------------- -------------- --------------
Amount Yield Amount Yield Amount Yield
-------- ----- -------- ----- -------- -----
(Dollars in thousands)
Commercial loans............... $120,152 8.50% $106,594 7.69% $ 75,406 7.96%
Real estate-commercial;
construction, land acquisition
and development loans 203,687 8.40 171,428 8.07 125,347 8.80
Residential mortgage loans..... 126,717 7.11 119,825 6.99 106,056 7.17
Home equity loans.............. 94,078 8.14 77,986 7.41 68,547 7.97
Indirect loans................. 222,175 7.03 188,517 6.96 132,015 7.32
Consumer loans................. 11,465 8.85 11,582 8.27 13,701 8.53
-------- ---- -------- ---- -------- ----
Total.......................... $778,274 7.79% $675,932 7.44% $521,072 7.86%
======== ==== ======== ==== ======== ====
The following table indicates the maturity distribution of selected loans at
December 31, 2000:
Maturity Distribution of Selected Loans
One year One to Over
or five five
less(/1/) years years Total
--------- -------- -------- --------
(Dollars in thousands)
Commercial loans......................... $ 69,276 $ 55,991 $ 11,047 $136,314
Real estate--commercial; construction,
land acquisition and development loans.. 27,111 89,590 110,761 227,462
Residential mortgage loans............... 4,210 11,443 112,141 127,794
Home equity loans........................ 8,818 67,304 26,719 102,841
-------- -------- -------- --------
$109,415 $224,328 $260,668 $594,411
======== ======== ======== ========
- --------
(/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, 2000:
Fixed
Rate Variable Rate Total
-------- ------------- --------
(Dollars in thousands)
Commercial loans............................... $ 30,202 $ 36,836 $ 67,038
Real estate--commercial; construction, land
acquisition
and development loans......................... 63,364 136,987 200,351
Residential mortgage loans..................... 51,938 71,646 123,584
Home equity loans.............................. 62,595 31,428 94,023
-------- -------- --------
$208,099 $276,897 $484,996
======== ======== ========
25
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, 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 2000, total deposits increased $84.2 million or 9% compared to
1999. This increase was primarily due to a $44.8 million increase in time
deposits and a $54.6 million increase in money market accounts which was the
result of successful retail deposit promotions and to a lesser extent, a move
by consumers from the lower rate savings accounts to these higher rate
accounts. In addition, through successful marketing, the Company increased
noninterest-bearing demand deposits, primarily business accounts, by $25.3
million at year-end 2000. At December 31, 2000, there were no brokered
deposits.
Average deposits for 2000 increased $110.5 million or 13% as compared to
1999. The increase in average deposits was primarily due to a $89.1 million
increase in average time deposits and a $44.5 million increase in average
money market deposits offset by a $33.4 million decrease in average savings
and NOW accounts. In addition, average noninterest-bearing demand deposits,
primarily business accounts, increased $10.4 million in 2000.
Average deposits for 1999 increased $113.0 million or 16% as compared to
1998. The increase in average deposits was primarily due to an $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 and Rate by Type
2000 1999 1998
------------- ------------- -------------
Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- -------- ----
(Dollars in thousands)
Noninterest-bearing demand
deposits........................ $199,753 -- % $189,448 -- % $170,146 -- %
Savings deposits and NOW
accounts........................ 139,014 3.02 172,452 2.76 171,067 3.34
Money market accounts............ 92,581 4.75 48,112 3.43 40,139 3.24
Time deposits.................... 520,297 6.05 431,150 5.43 346,807 5.77
-------- ---- -------- ---- -------- ----
Total............................ $951,645 4.21% $841,162 3.55% $728,159 3.71%
======== ==== ======== ==== ======== ====
As of December 31, 2000, the scheduled maturities of time deposits are as
follows:
Maturity Distribution of Time Deposits
(Dollars
in
thousands)
2001................................................................. $437,669
2002................................................................. 64,519
2003................................................................. 3,784
2004................................................................. 1,381
2005................................................................. 6,873
2006 and thereafter.................................................. 85
--------
Total................................................................ $514,311
========
Borrowings
Short-term borrowings, which include Federal funds purchased, securities
sold under agreements to repurchase and Treasury, tax and loan demand notes,
were $83.7 million at December 31, 2000, down $14.3 million from $98.0 million
at the end of 1999. The 2000 decrease was primarily due to a decrease in
26
Treasury tax and loan demand notes and to a lesser extent, a decrease in
Federal funds purchased and securities sold under agreements to repurchase. In
1999, short-term borrowings increased to $98.0 million from $87.3 million in
1998, primarily due to an increase in Treasury tax and loan demand notes
partially offset by a decrease in Federal funds purchased and an increase in
securities sold under agreements to repurchase.
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 $81.0 million
at December 31, 2000 from $63.0 million at December 31, 1999, up 29%. In 1999
total FHLB borrowings increased 10% from $57.5 million at December 31, 1998.
Borrowings mature from 2002 to 2008 and bear fixed interest rates ranging from
5.23% to 7.14%. At December 31, 2000, $25 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.
At December 31, 2000, the Company has $6 million in Trust Preferred Capital
Securities outstanding bearing an interest rate of 10.6% and maturing in 2030.
These securities represent the Company's participation in a $300 million
Pooled Trust Preferred Program that was distributed in an institutional
private placement. The proceeds, which qualify as Tier I Capital for
regulatory purposes, were used to pay down $2.1 million in short-term debt,
repurchase Company stock and the balance is available for general corporate
purposes and to provide capital to support the Company's and the Bank's future
growth.
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, 2000, the Company's shareholders' equity climbed to $87.6
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. See Item 8 under Note 9 to the financial statements for
regulatory capital disclosures.
In 2000, cash dividends declared totaled $2,812,000, an 8% increase from
1999. In 1999, cash dividends declared totaled $2,596,000, a 14% increase from
1998. The dividend payout ratio for 2000 was 25.45% as compared to 24.62% in
1999.
During 2000, the Company repurchased a total of 253,500 shares of Common
Stock at an average cost of $15.28 per share. In 1999, repurchases totaled
105,500 shares as an average cost of $18.79 per share. These repurchases were
made under three separate Board approved Stock Repurchase programs and can be
made in the open market or through negotiated transactions from time to time
depending on market conditions. The stock repurchased is held as treasury
stock to be used for general corporate purposes. The stock repurchase programs
in place during 2000 are as follows:
. On January 27, 1998, the Company's Board of Directors authorized a stock
repurchase program allowing the Company to repurchase up to 200,000
shares, of its Common Stock through mid-1999. This program was extended
through December 31, 2000. This plan was completed in February 2000 at
an average price of $19.65 per share.
27
. On January 25, 2000, the Board of Directors authorized a stock
repurchase program allowing the Company to repurchase up to 200,000
shares of its Common Stock through mid-2001. This plan was completed in
September 2000 at an average price of $15.26 per share.
. On August 31, 2000, the Board of Directors authorized an additional
stock repurchase program which allows the Company to purchase up to
200,000 shares (or approximately 3% of outstanding shares) of Common
Stock through January 2002. Through December 31, 2000, the company has
repurchased 45,146 shares under this plan at an average price of $15.08
per share.
Branch Expansion
The Company's primary strategy is to invest in future growth through branch
expansion in the Chicago metropolitan area. This form of growth requires a
significant investment in nonearning assets during the construction phase.
Upon completion, for a time, expenses exceed the income of the branch. While
new branches retard short-term earnings, we believe our market warrants
judicious office additions.
In November 2000, the Bank opened its first Chicago branch at Huron and
Dearborn Streets in the River North area of Chicago, Illinois. The Company
began depreciating capitalized costs associated with this branch when the
branch was put into service.
In March 2001, the Bank closed on the purchase of property in Bolingbrook,
Illinois. The Bank will be constructing its 14th location on this site.
Condensed Quarterly Earnings Summary
2000 1999
------------------------------- -------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(in thousands)
Interest income......... $22,071 $21,719 $21,090 $19,303 $18,474 $17,796 $16,941 $16,249
Interest expense........ 13,594 13,581 12,741 11,062 10,214 9,601 8,978 8,330
------- ------- ------- ------- ------- ------- ------- -------
Net interest income..... $ 8,477 $ 8,138 $ 8,349 $ 8,241 $ 8,260 $ 8,195 $ 7,963 $ 7,919
Provision for loan
losses................. 225 225 225 225 210 210 210 210
Other income............ 2,842 2,653 2,593 2,394 2,242 2,229 2,439 2,056
Other expense........... 6,634 6,721 6,934 6,828 6,417 6,409 6,534 6,280
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. $ 4,460 $ 3,845 $ 3,783 $ 3,582 $ 3,875 $ 3,805 $ 3,658 $ 3,485
Income taxes............ 1,354 1,126 1,103 1,038 1,134 1,111 1,040 992
------- ------- ------- ------- ------- ------- ------- -------
Net Income.............. $ 3,106 $ 2,719 $ 2,680 $ 2,544 $ 2,741 $ 2,694 $ 2,618 $ 2,493
======= ======= ======= ======= ======= ======= ======= =======
The above quarterly financial information contains all normal and recurring
reclassifications for a fair and consistent presentation.
Impact of New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS No. 138. The Statement
is effective January 1, 2001 for the Company. SFAS No. 133 requires all
derivatives to be recognized as either assets or liabilities on the balance
sheet, measured at fair value. Gains and losses resulting from changes in the
values of those derivatives would be accounted for in earnings. Depending on
the use of the derivative and the satisfaction of other requirements, special
hedge accounting may apply. As the Company has no freestanding derivative
instruments in place and has not identified any embedded derivatives, the
adoption of SFAS No. 133 on January 1, 2001 did not materially impact the
position or results of operation of the Company.
28
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities--a replacement of FASB Statement No. 125". This
Statement revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures,
but carries over most of SFAS No. 125's provisions without reconsideration.
This Statement is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after March 31, 2001. This
Statement is effective for recognition and reclassification of collateral and
for disclosures relative to securitization transactions and collateral for
fiscal years ending after December 15, 2000. The adoption of SFAS No. 140 is
not expected to impact the position or results of operation of the Company.
Forward Looking Statements
Except for historical matters, 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 conditions, interest rates, legislative or regulatory
changes, loan demand, depositor preferences, the ability to attract and retain
experienced senior management and construction buildout or other delays
relating to branch expansion. 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,
----------------------
2000 1999
---------- ----------
(Dollars in
thousands)
Assets
Cash and due from banks............................... $ 55,291 $ 47,080
Federal funds sold and securities purchased under
agreements to resell................................. 15,640 --
Interest-bearing deposits with banks.................. 119 488
Investment securities:
Securities held-to-maturity, at amortized cost (fair
value of $99,617 and $93,202 in 2000 and 1999,
respectively)...................................... 98,131 94,425
Securities available-for-sale, at fair value........ 221,854 254,182
---------- ----------
Total investment securities........................... 319,985 348,607
Loans, net of unearned discount....................... 825,020 719,969
Less-allowance for loan losses........................ (5,682) (4,828)
---------- ----------
Net loans........................................... 819,338 715,141
Premises and equipment, net........................... 23,117 21,809
Other assets.......................................... 15,782 13,231
---------- ----------
Total Assets.......................................... $1,249,272 $1,146,356
========== ==========
Liabilities and Shareholders' Equity
Noninterest-bearing demand deposits................... $ 221,552 $ 196,243
Interest-bearing deposits:
Savings deposits and NOW accounts................... 130,602 171,135
Money market accounts............................... 111,761 57,186
Time deposits
Under $100,000.................................... 279,139 236,108
$100,000 and over................................. 235,172 233,400
---------- ----------
Total interest-bearing deposits....................... 756,674 697,829
---------- ----------
Total deposits........................................ 978,226 894,072
Federal funds purchased and securities sold under
agreements to repurchase............................. 71,967 78,008
Treasury, tax and loan demand notes................... 11,740 20,000
Federal Home Loan Bank borrowings..................... 81,000 63,000
Trust Preferred Capital Securities.................... 6,000 --
Other liabilities..................................... 12,733 11,277
---------- ----------
Total Liabilities..................................... 1,161,666 1,066,357
Shareholders' Equity:
Preferred stock, series B, no par value, authorized--
100,000 shares, issued--none......................... -- --
Common Stock, $2 par value, authorized--16,000,000
shares in 2000 and 1999, issued--7,283,256 shares in
2000 and 1999, outstanding--6,345,745 shares in 2000
and 6,531,314 shares in 1999......................... 14,567 14,567
Surplus............................................... 11,849 11,985
Accumulated other comprehensive income (loss), net of
tax.................................................. 1,410 (1,245)
Retained earnings..................................... 70,593 62,356
Less cost of shares in treasury, 937,511 and 751,942
common shares in 2000 and 1999, respectively......... (10,813) (7,664)
---------- ----------
Total Shareholders' Equity............................ 87,606 79,999
---------- ----------
Total Liabilities and Shareholders' Equity............ $1,249,272 $1,146,356
========== ==========
See accompanying notes to consolidated financial statements.
30
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December
31,
-----------------------
2000 1999 1998
------- ------- -------
(Dollars in thousands
except per share
amounts)
Interest income:
Interest and fees on loans............................ $60,450 $50,078 $40,811
Interest on securities:
U.S. Treasury and Government agencies................ 18,031 14,208 14,127
Obligations of states and political subdivisions..... 2,979 2,825 2,574
Other securities..................................... 888 830 1,314
Interest on Federal funds sold and securities
purchased under agreements to resell................. 1,821 1,118 2,106
Interest on deposits with banks....................... 14 401 764
------- ------- -------
Total interest income.................................. 84,183 69,460 61,696
Interest expense:
Interest on savings deposits and NOW accounts......... 4,201 4,765 5,711
Interest on money market accounts..................... 4,400 1,648 1,302
Interest on time deposits............................. 31,465 23,428 20,016
Interest on Federal funds purchased and securities
sold under agreements to repurchase.................. 5,405 3,042 2,491
Interest on Treasury, tax and loan demand notes....... 1,019 370 523
Interest on Federal Home Loan Bank borrowings......... 4,286 3,870 3,243
Interest on Trust Preferred Capital Securities........ 202 -- --
------- ------- -------
Total interest expense................................. 50,978 37,123 33,286
------- ------- -------
Net interest income.................................... 33,205 32,337 28,410
Provision for loan losses.............................. 900 840 630
------- ------- -------
Net interest income after provision for loan losses.... 32,305 31,497 27,780
------- ------- -------
Other income:
Service charges on deposit accounts................... 4,671 3,600 3,190
Investment management and trust fees.................. 1,144 1,128 1,048
Merchant credit card processing fees.................. 2,552 1,858 1,329
Fees on mortgages sold, net........................... 177 422 416
Income from revenue sharing agreement................. 900 900 900
Other operating income................................ 1,020 979 1,029
Investment securities gains, net of losses............ 18 79 79
------- ------- -------
Total other income..................................... 10,482 8,966 7,991
------- ------- -------
Other expenses:
Salaries and employee benefits........................ 16,171 15,817 13,680
Occupancy expense..................................... 1,797 1,683 1,566
Equipment expense..................................... 2,011 1,824 1,906
Data processing....................................... 1,028 968 776
Postage, stationery and supplies...................... 869 865 834
Advertising and business development.................. 1,356 1,231 1,090
Merchant credit card interchange expense.............. 1,942 1,419 994
Other operating expenses.............................. 1,943 1,833 1,577
------- ------- -------
Total other expenses................................... 27,117 25,640 22,423
------- ------- -------
Income before income taxes............................. 15,670 14,823 13,348
Income tax expense..................................... 4,621 4,277 3,907
------- ------- -------
Net income............................................. $11,049 $10,546 $ 9,441
======= ======= =======
Basic earnings per share............................... $ 1.72 $ 1.60 $ 1.42
======= ======= =======
Diluted earnings per share............................. $ 1.70 $ 1.57 $ 1.39
======= ======= =======
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,
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
$671, 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
$3,456, 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
---------- ------- --------- ------- ------- ------- ------- -------- -------
Comprehensive income,
net of tax
Net income............. 11,049 11,049
Unrealized holding gain
during the period of
$2,667, net of
reclassification
adjustment for
realized gain included
in net income of $12.. 2,655 2,655
-------
Total comprehensive
income................. 13,704
Dividends declared...... (2,812) (2,812)
Exercise of stock
options (including tax
benefit)............... (136) 723 587
Purchase of treasury
stock (253,500 common
shares)................ (3,872) (3,872)
---------- ------- --------- ------- ------- ------- ------- -------- -------
Balance at December 31,
2000................... -- $ -- 7,283,256 $14,567 $11,849 $ 1,410 $70,593 $(10,813) $87,606
========== ======= ========= ======= ======= ======= ======= ======== =======
See accompanying notes to consolidated financial statements.
32
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------
2000 1999 1998
--------- --------- ---------
(Dollars in thousands)
Cash flows from operating activities:
Net income................................... $ 11,049 $ 10,546 $ 9,441
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............... 2,220 2,024 2,056
Discount accretion.......................... (856) (875) (1,398)
Premium amortization........................ 1,113 1,274 1,255
Provision for loan losses................... 900 840 630
Deferred taxes.............................. (111) (244) (1,039)
Investment securities gains, net of losses.. (18) (79) (79)
Increase (decrease) from revenue sharing
agreement.................................. (3) 17 19
Origination of real estate loans for sale... (15,832) (36,197) (55,469)
Proceeds from sale of real estate loans
originated for sale........................ 16,059 39,962 53,219
Gain on sale of mortgage loans originated
for sale................................... (264) (629) (711)
FHLB stock dividend......................... (310) -- --
Increase in other assets.................... (2,550) (4,133) (1,340)
Increase in other liabilities............... 200 3,684 1,260
Amortization of intangible assets........... -- -- 42
--------- --------- ---------
Net cash provided by operating activities..... 11,597 16,190 7,886
Cash flows from investing activities:
Interest-bearing deposits with banks:
Proceeds from maturities.................... -- 11,480 --
Securities held-to-maturity:
Purchases................................... (32,769) (22,737) (66,156)
Proceeds from maturities, calls and
paydowns................................... 29,179 65,788 68,121
Securities available-for-sale:
Purchases................................... (46,549) (303,996) (151,125)
Proceeds from maturities, calls and
paydowns................................... 53,234 76,939 48,327
Proceeds from sales......................... 29,620 127,438 106,417
Increase in loans............................ (105,060) (91,575) (182,208)
Purchases of premises and equipment.......... (3,526) (2,801) (4,315)
--------- --------- ---------
Net cash used in investing activities......... (75,871) (139,464) (180,939)
Cash flows from financing activities:
Increase in noninterest bearing demand
deposits.................................... 25,309 9,034 33,403
Increase in interest-bearing deposit
accounts.................................... 58,845 107,236 116,636
Increase (decrease) in Federal funds
purchased and securities sold under
agreements to repurchase.................... (6,041) (5,578) 30,978
Increase (decrease) in Treasury, tax and loan
demand notes................................ (8,260) 16,318 (8,826)
Proceeds from Federal Home Loan Bank
borrowings.................................. 23,000 10,500 42,500
Repayment of Federal Home Loan Bank
borrowings.................................. (5,000) (5,000) (27,500)
Proceeds from Trust Preferred Capital
Securities.................................. 6,000 -- --
Purchase of treasury stock................... (3,872) (1,982) (2,546)
Exercise of stock options.................... 587 478 168
Cash dividends............................... (2,812) (2,596) (2,282)
--------- --------- ---------
Net cash provided by financing activities..... 87,756 128,410 182,531
--------- --------- ---------
Net increase in cash and cash equivalents..... 23,482 5,136 9,478
Cash and cash equivalents at beginning of
year......................................... 47,568 42,432 32,954
--------- --------- ---------
Cash and cash equivalents at end of year...... $ 71,050 $ 47,568 $ 42,432
========= ========= =========
Supplemental disclosures:
Interest paid................................ $ 53,318 $ 41,200 $ 32,697
Income taxes paid............................ 4,175 4,672 3,204
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 subsidiaries, Oak
Brook Bank (the Bank) and FOBB Statutory Trust I. Also included are the
accounts of Oak Real Estate Development Corporation, a wholly owned subsidiary
of the Bank. All intercompany accounts and transactions have been eliminated
in consolidation. The accounting and reporting policies of the Company and its
subsidiaries conform to accounting principles generally accepted in the United
States of America and to general practice within the banking industry.
The Company, through the 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 vehicle loans.
The Bank has a full service investment management and trust department.
The Bank formed a wholly-owned real estate subsidiary in 2000, Oak Real
Estate Development Corporation, for the purpose of real estate development.
The subsidiary will acquire, develop, rehabilitate, sell and/or rent single
and multi-family residential real estate, residential apartment buildings and
commercial properties that are part of or ancillary to residential real estate
in Illinois.
The Company formed a wholly owned subsidiary in 2000, FOBB Statutory Trust
I, for the purpose of participating in a Pooled Trust Preferred Program. See
Note 6 to the financial statements for further discussion regarding this
program.
Use of Estimates: The preparation of the consolidated financial statements
in conformity with accounting principles generally accepted in the United
States of America 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.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 vehicle 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, 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 subsidiaries file consolidated income tax
returns. The Bank 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 the
change in 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 1999 and 1998 consolidated
financial statements have been reclassified to conform to their 2000
presentation.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
New Accounting Standards: In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standard ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended by
SFAS No. 138. The Statement is effective January 1, 2001 for the Company. SFAS
No. 133 requires all derivatives to be recognized as either assets or
liabilities on the balance sheet, measured at fair value. Gains and losses
resulting from changes in the values of those derivatives would be accounted
for in earnings. Depending on the use of the derivative and the satisfaction
of other requirements, special hedge accounting may apply. As the Company has
no freestanding derivative instruments in place and has not identified any
embedded derivatives, the adoption of SFAS No. 133 on January 1, 2001 did not
materially impact the position or results of operation of the Company.
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities--a replacement of FASB Statement No. 125". This
Statement revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures,
but carries over most of SFAS No. 125's provisions without reconsideration.
This Statement is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after March 31, 2001. This
Statement is effective for recognition and reclassification of collateral and
for disclosures relative to securitization transactions and collateral for
fiscal years ending after December 15, 2000. The adoption of SFAS No. 140 is
not expected to impact the position or results of operation of the Company.
Note 2. Cash and Due From Banks
Cash and due from banks include reserve balances that the Bank is required
to maintain in either vault cash or with the Federal Reserve Bank of Chicago.
These required reserves are based principally on deposits outstanding. The
reserves required at December 31, 2000 and 1999 were $3,952,000 and
$4,277,000, respectively.
36
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)
2000
Securities available-for-sale:
U.S. Treasury....................... $ 16,466 $ 257 $ -- $ 16,723
U.S. Government agencies............ 161,605 1,541 (83) 163,063
Agency mortgage-backed securities... 7,495 5 (61) 7,439
Agency collateralized mortgage
obligations........................ 808 -- (1) 807
Obligations of states and political
subdivisions....................... 20,117 515 (21) 20,611
Corporate and other securities...... 13,227 217 (233) 13,211
-------- ------ ------- --------
Total securities available-for-
sale............................... $219,718 $2,535 $ (399) $221,854
======== ====== ======= ========
Securities held-to-maturity:
U.S. Treasury....................... $ 10,117 $ -- $ (47) $ 10,070
U.S. Government agencies............ 49,853 899 (3) 50,749
Agency mortgage-backed securities... 4,422 18 (5) 4,435
Agency collateralized mortgage
obligations........................ -- -- -- --
Obligations of states and political
subdivisions....................... 33,239 727 (129) 33,837
Corporate and other securities...... 500 26 -- 526
-------- ------ ------- --------
Total securities held-to-maturity... $ 98,131 $1,670 $ (184) $ 99,617
======== ====== ======= ========
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
======== ====== ======= ========
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amortized cost and fair value of investment securities at December 31,
2000, 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 equity
securities and $5.6 million in 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................................ $ 36,202 $ 36,193
Due after one year through five years.................. 106,973 107,998
Due after five years through ten years................. 63,793 64,865
Over ten years......................................... 6,848 6,836
Other securities....................................... 5,902 5,962
-------- --------
$219,718 $221,854
======== ========
Securities held-to-maturity:
Due in one year or less................................ $ 20,201 $ 20,166
Due after one year through five years.................. 22,767 23,108
Due after five years through ten years................. 53,818 54,995
Over ten years......................................... 1,345 1,348
-------- --------
$ 98,131 $ 99,617
======== ========
At December 31, 2000, investment securities with a book value of
$283,486,000 were pledged as collateral to secure certain deposits, securities
sold under agreements to repurchase and for other purposes as required by law.
Proceeds from sales of available-for-sale investments in debt and equity
securities during 2000, 1999 and 1998 were $29,620,000, $127,438,000 and
$106,417,000, respectively. Gross gains of $388,000 and gross losses of
$370,000 were realized on those sales in 2000. Included in the gains in 2000
is a gain of $254,000 from the revaluation of stock received in the exchange
of the Company's privately held shares of Cash Station, Inc. for publicly
traded shares of Concord EFS, Inc. 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.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4. Loans
Loans outstanding at December 31 follow:
2000 1999
-------- --------
(Dollars in
thousands)
Commercial loans......................................... $136,314 $107,557
Real estate loans--
Construction, land acquisition and development......... 46,082 22,566
Commercial mortgage.................................... 181,380 158,008
Residential mortgage................................... 127,794 120,191
Home equity............................................ 102,841 85,343
Indirect loans........................................... 219,348 215,364
Consumer loans........................................... 11,399 11,274
-------- --------
Total loans............................................ 825,158 720,303
Less unearned discount................................. (138) (334)
-------- --------
Loans, net of unearned discount........................ $825,020 $719,969
======== ========
The Company originates real estate, commercial and consumer loans primarily
within the Chicago Metropolitan area. In 2000, the Bank began to participate
in some larger nationally syndicated loans on properties outside of the
Chicago area; however, there is no concentration of these loans in any other
region of the United States. Generally, real estate and consumer loans are
secured by various items of property such as first and second mortgages,
automobiles, motorcycles and cash collateral. Substantially all the commercial
portfolio is secured by business assets.
The Company's indirect loan portfolio is primarily generated from Chicago
Metropolitan area auto and motorcycle dealers. Included in this total for 2000
is $5.4 million in Harley Davidson motorcycle loans originated as part of a
national marketing initiative. The Company utilizes credit underwriting
standards that management believes result in high quality new and used
indirect 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 have any sub-prime loan programs.
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 for
residential mortgages 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 consolidated 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.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of these commitments to extend credit at December 31 follows:
2000 1999
-------- --------
(Dollars in
thousands)
Commercial............................................... $ 99,086 $ 59,984
Real estate--commercial; construction, land acquisition
and development......................................... 59,156 24,389
Home equity.............................................. 114,272 110,699
Check credit............................................. 848 834
-------- --------
Total commitments to extend credit....................... $273,362 $195,906
======== ========
An analysis of the allowance for loan losses follows:
2000 1999 1998
------ ------ ------
(Dollars in
thousands)
Balance at beginning of year......................... $4,828 $4,445 $4,329
Provision for loan losses............................ 900 840 630
Recoveries........................................... 164 71 215
Charge-offs.......................................... (210) (528) (729)
------ ------ ------
Balance at end of year............................... $5,682 $4,828 $4,445
====== ====== ======
The Company had $121,000 and $90,000 of nonaccrual loans at December 31,
2000 and 1999, respectively. None of the loans were considered impaired for
2000. Included in the non-accrual loan total for 1999 was a $40,000 impaired
loan which did not have a specific valuation allowance. The average balance of
impaired loans was $16,000 and $134,000 for 2000 and 1999, respectively. The
Company did not recognize any interest income associated with impaired loans
during 2000, 1999 or 1998. If interest had been accrued at its original rate,
such income would have approximated $2,000 in 2000 and $15,000 in 1999. There
were no impaired loans during 1998.
Note 5. Premises and Equipment
A summary of premises and equipment at December 31 follows:
2000 1999
------- -------
(Dollars in
thousands)
Land..................................................... $ 4,283 $ 4,283
Buildings and improvements............................... 20,875 18,949
Leasehold improvements................................... 1,005 999
Data processing equipment, office equipment and
furniture............................................... 15,355 14,176
------- -------
41,518 38,407
Less accumulated depreciation and amortization........... (18,401) (16,598)
------- -------
Premises and equipment, net.............................. $23,117 $21,809
======= =======
40
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 extend until 2009, are
as follows:
(Dollars
in
thousands)
2001.............................................................. 300
2002.............................................................. 245
2003.............................................................. 188
2004.............................................................. 165
2005.............................................................. 171
2006 and thereafter............................................... 728
------
$1,797
======
Total rental expense for 2000, 1999, and 1998 was approximately $223,000,
$197,000 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)
2001.............................................................. $342
2002.............................................................. 1
----
$343
====
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, 2000, 1999 and 1998 consisted of
Federal funds purchased, securities sold under repurchase agreements (repos),
Treasury, tax and loan demand notes and Federal Home Loan Bank (FHLB)
borrowings. In 2000, the Company also had Trust Preferred Capital Securities.
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. The
Treasury, tax and loan demand notes are generally repaid within 30 to 90 days
from the transaction date.
Federal funds purchased, repos and Treasury, tax and loan demand notes:
2000 1999 1998
-------- ------- -------
(dollars in thousands)
At December 31...................................... $ 83,707 $98,008 $87,268
Average during the year............................. 108,476 71,828 59,110
Maximum month-end balance........................... 181,126 98,150 87,268
Average rate at year-end............................ 5.75% 4.93% 5.09%
Average rate during the year........................ 5.72% 4.75% 5.10%
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Federal Home Loan Bank fixed rate borrowings at December 31:
2000 1999
------------ ------------
Maturity Amount Rate Amount Rate
- -------- ------- ---- ------- ----
(dollars in thousands)
June 18, 2002....................................... $ -- -- % $ 5,000 5.71%
September 25, 2002.................................. 5,000 6.41 5,000 6.41
February 5, 2003.................................... 1,000 5.59 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
November 24, 2003................................... 8,000 6.50 -- --
January 7, 2004..................................... 6,000 5.49 6,000 5.49
February 7, 2005.................................... 1,500 5.74 1,500 5.74
February 19, 2005................................... 10,000 5.97 10,000 5.97
March 21, 2005(/1/)................................. 5,000 6.53 -- --
March 21, 2005(/2/)................................. 5,000 6.20 -- --
March 21, 2005...................................... 5,000 7.14 -- --
February 5, 2007.................................... 2,000 5.83 2,000 5.83
January 12, 2008(/3/)............................... 15,000 5.23 15,000 5.23
February 19, 2008................................... 6,000 6.04 6,000 6.04
------- ---- ------- ----
Total/Average rate.................................. $81,000 5.96% $63,000 5.72%
======= =======
- --------
(1) Callable beginning March 20, 2002.
(2) Callable beginning March 20, 2001.
(3) Callable beginning January 12, 2003.
The borrowings due on June 18, 2002 were called on March 20, 2000. Callable
securities have the potential to be called in whole or in part on a quarterly
basis. The Bank has a commitment to borrow an additional $5,000,000 on
February 7, 2001 which is not considered outstanding at December 31, 2000.
This advance matures on February 9, 2004 and has an interest rate of 6.76%.
The Bank has adopted a collateral pledge agreement whereby the Bank 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 FHLB. In
addition, the Bank specifically assigned certain loans to the FHLB which
increases the Company's borrowing capacity. All stock in the FHLB, totaling
$5,642,000 and $5,719,000 at December 31, 2000 and 1999, respectively, is
pledged as additional collateral for these borrowings.
At December 31, 2000, the Company has a revolving credit arrangement with a
third party unaffiliated bank for $15 million which matures on March 31, 2001.
There was no balance outstanding at December 31, 2000 and 1999. During 2000
the line had an average outstanding balance of $577,000 with an average cost
of 7.39% and a maximum month end balance of $2.1 million. The line was unused
during 1999.
The Company has $6 million of Trust Preferred Capital Securities outstanding
at December 31, 2000 that were part of a $300 million Pooled Trust Preferred
offering distributed in an institutional private placement. The securities
bear an interest rate of 10.6% and mature on September 15, 2030 and are non-
callable for 10 years and, after that period, the securities have a declining
10 year premium call. The Trust Preferred Capital Securities, subject to
certain limitations, are included in Tier 1 Capital for regulatory purposes.
Dividends on the Trust Preferred Capital Securities are recorded as interest
expense and totaled $202,000 in 2000.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7. Income Taxes
The components of income tax expense for the years ended December 31 follow:
2000 1999 1998
------ ------ ------
(Dollars in
thousands)
Current Provision.................................... $4,732 $4,521 $4,946
Deferred benefit..................................... (111) (244) (1,039)
------ ------ ------
Total income tax expense............................. $4,621 $4,277 $3,907
====== ====== ======
The net deferred tax assets at December 31 consisted of the following:
2000 1999
----------- -----------
(Dollars in thousands)
Gross deferred tax liabilities:
Unrealized gains on securities available-for-
sale............................................ $ 726 $ --
Accretion of discount on securities.............. 234 174
Depreciation..................................... 766 740
Book over tax basis of land...................... 205 205
FHLB stock dividends............................. 180 --
Deferred loan costs.............................. 184 456
Other, net....................................... 288 141
----------- -----------
Total deferred tax liabilities................. 2,583 1,716
Gross deferred tax assets:
Unrealized loss on securities available-for-
sale............................................ -- 641
Book over tax loan loss reserve.................. 2,254 1,915
Revenue sharing agreement........................ 427 682
Retirement plan.................................. 385 314
Deferred expenses................................ 593 496
----------- -----------
Total deferred tax assets...................... $ 3,659 4,048
----------- -----------
Net deferred tax assets........................ $ 1,076 $ 2,332
=========== ===========
No valuation allowance related to deferred tax assets has been recorded at
December 31, 2000 and 1999 as management believes it is more likely than not
that the deferred tax assets will be fully realized.
The effective tax rates for 2000, 1999, and 1998 were 29.5%, 28.9%, and
29.3%, respectively. Income tax expense was less than the amount computed by
applying the Federal statutory rate of 35% due to the following:
2000 1999 1998
------ ------ ------
(Dollars in
thousands)
Tax expense at statutory rate....................... $5,486 $5,188 $4,672
Increase (decrease) in taxes resulting from:
Income from obligations of states and political
subdivisions and certain loans not subject to
Federal income taxes............................. (917) (956) (872)
State income taxes................................ (39) 166 147
Other, net........................................ 91 (121) (40)
------ ------ ------
Total income tax expense............................ $4,621 $4,277 $3,907
====== ====== ======
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
At December 31, 2000, the Company has reserved for issuance 535,343 shares
of Common Stock for the Stock Option Plan.
Payment of dividends by the 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, 2000,
$21,676,000 of undistributed earnings was available for the payment of
dividends by the subsidiary bank without prior regulatory approval.
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, 2000 and 1999, that the Company and the Bank 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, 2000 and 1999, the most
recent regulatory notification categorized the Bank subsidiary as well
capitalized. At December 31, 2000, there are no conditions or events since
that notification that management believes have changed the institution's
category.
44
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, 2000:
Total Capital (to Risk Weighted
Assets)
Consolidated..................... $97,877 10.35% $75,682 8% $94,602 10%
Oak Brook Bank................... 94,895 10.04 75,582 8 94,478 10
Tier 1 Capital (to Risk Weighted
Assets)
Consolidated..................... $92,195 9.75% $37,841 4% $56,761 6%
Oak Brook Bank................... 89,213 9.44 37,791 4 56,687 6
Tier 1 Capital (to Average Assets)
Consolidated..................... $92,195 7.47% $49,337 4% $61,671 5%
Oak Brook Bank................... 89,213 7.24 49,275 4 61,593 5
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
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, 2000, 1999 and 1998:
2000 1999 1998
----------- ----------- ----------
Net income.............................. $11,049,000 $10,546,000 $9,441,000
=========== =========== ==========
Denominator for basic earnings per
share-weighted average shares
outstanding............................ 6,432,411 6,604,887 6,649,075
Effect of diluted securities:
Stock options issued to employees and
directors............................ 72,714 128,360 162,266
----------- ----------- ----------
Denominator for diluted earnings per
share outstanding...................... 6,505,125 6,733,247 6,811,341
=========== =========== ==========
Earnings per share:
Basic................................. $ 1.72 $ 1.60 $ 1.42
Diluted............................... $ 1.70 $ 1.57 $ 1.39
=========== =========== ==========
At December 31, 2000, 1999 and 1998 there were on average 197,833, 51,884
and 5,392 options outstanding, respectively, that were not included in diluted
earnings per share because their effect would be antidilutive.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11. Contingencies
The Company and the Bank are not subject to any material pending or
threatened legal actions as of December 31, 2000.
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 2000, 1999 and 1998.
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 2000, 1999,
and 1998, respectively: risk-free interest rates of 4.83%, 6.57% and 5.0%;
dividend yields of 3.1%, 2.8% and 2.3%, volatility factor of the expected
market price of the Company's Common Stock of 30.0%, 27.8% and 30.0%; 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:
2000 1999 1998
----------- ----------- ----------
Net income as reported.................. $11,049,000 $10,546,000 $9,441,000
Pro forma net income.................... $10,855,000 $10,326,000 $9,324,000
Earnings per share as reported:
Basic................................. $ 1.72 $ 1.60 $ 1.42
Diluted............................... $ 1.70 $ 1.57 $ 1.39
Pro forma earnings per share:
Basic................................. $ 1.69 $ 1.56 $ 1.40
Diluted............................... $ 1.67 $ 1.53 $ 1.37
Weighted-average fair value of options
granted during the year:............... $ 4.12 $ 4.98 $ 5.82
46
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:
2000 1999 1998
------------------ ------------------ ------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- --------- ------- --------- ------- ---------
Outstanding at the
beginning of the year.. 500,326 $12.40 448,624 $ 9.99 416,774 $ 8.48
Granted................. 46,100 16.10 124,500 18.27 54,500 21.42
Exercised............... (73,175) 5.94 (57,798) 4.93 (13,750) 8.00
Forfeited............... (21,401) 16.25 (15,000) 17.63 (8,900) 12.29
------- ------- -------
Outstanding at the end
of the year............ 451,850 $13.65 500,326 $12.40 448,624 $ 9.99
======= ======= =======
Exercisable at the end
of the year............ 288,820 $11.49 288,829 $ 9.13 279,424 $ 7.59
======= ======= =======
Exercise prices for options outstanding as of December 31, 2000 ranged from
$7.47 to $24.00 per share. The weighted-average remaining contractual life of
those options is 6.3 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 2000, 1999 and 1998, the Company's
expense for this plan was $371,000, $335,000 and $287,000, 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 2000, 1999 and 1998, the Company's expense for this plan was $209,000,
$193,000 and $172,000, 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 2000, 1999 and 1998 the Company's expense for this
plan was $73,000, $109,000 and $89,000, 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 2000, 1999 and 1998,
the Company's expense for this plan was $179,000, $172,000 and $162,000,
respectively.
Note 14. Related Party Transactions
The 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
$8,758,000 and $8,953,000 at December 31, 2000 and 1999, respectively. During
2000, new related party loans totaled $3,596,000 and repayments totaled
$3,791,000. Included in repayments are loans that had a balance of $491,000 at
December 31, 1999 that were made to individuals no longer considered insiders.
47
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, 2000 and
1999, 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 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.
Trust Preferred Capital Securities: The fair value of the Trust Preferred
Capital Securities 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.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
The estimated fair values of the Company's significant financial instruments
as of December 31, 2000 and 1999, are as follows:
2000 1999
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(Dollars in thousands)
Financial Assets
Cash and due from banks and Federal funds
sold.................................... $ 70,931 $ 70,931 $ 47,080 $ 47,080
Interest-bearing deposits with banks..... 119 119 488 488
Investment securities.................... 319,985 321,471 348,607 347,384
Loans.................................... 825,020 819,753 719,969 709,504
Accrued interest receivable.............. 9,611 9,611 8,576 8,576
Financial Liabilities
Time deposits............................ 514,311 517,696 469,508 469,419
Other deposits........................... 463,915 463,915 424,564 424,564
Short-term debt.......................... 83,707 84,100 98,008 98,048
Federal Home Loan Bank borrowings........ 81,000 82,455 63,000 59,870
Trust Preferred Capital Securities....... 6,000 6,373 -- --
Accrued interest payable................. 5,692 5,692 5,235 5,235
Off-balance sheet commitments
Commercial............................... -- 81 -- 67
Home equity.............................. -- 97 -- 92
Check credit............................. -- 16 -- 16
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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,
---------------
2000 1999
------- -------
(Dollars in
thousands)
Assets
Cash and cash equivalents on deposit with subsidiary...... $ 3,799 $ 499
Investment in subsidiaries................................ 90,767 80,289
Securities available-for-sale............................. 320 1,425
Due from subsidiaries..................................... 757 131
Equipment, net............................................ 102 2
Other assets.............................................. 879 651
------- -------
Total Assets............................................ $96,624 $82,997
======= =======
Liabilities and Shareholders' equity
Trust Preferred Capital Securities........................ $ 6,000 $ --
Other liabilities......................................... 3,018 2,998
------- -------
Total liabilities....................................... 9,018 2,998
Shareholders' equity...................................... 87,606 79,999
------- -------
Total Liabilities and Shareholders' Equity.............. $96,624 $82,997
======= =======
Statements of Income (Parent Company Only)
Years Ended December 31,
------------------------
2000 1999 1998
------- ------- ------
(Dollars in thousands)
Income:
Dividends from subsidiaries...................... $ 6,316 $ 333 $5,425
Other income..................................... 777 878 1,060
Gain on sales of securities...................... 293 79 --
------- ------- ------
Total income................................... 7,386 1,290 6,485
------- ------- ------
Expenses:
Interest on Trust Preferred Capital Securities... 202 -- --
Other expenses................................... 2,192 2,637 2,158
------- ------- ------
Total expenses................................. 2,394 2,637 2,158
------- ------- ------
Income (loss) before income taxes and equity in
undistributed net income of subsidiaries.......... 4,992 (1,347) 4,327
Income tax benefit............................. 450 578 363
------- ------- ------
Income (loss) before equity in undistributed net
income of subsidiaries............................ 5,442 (769) 4,690
Equity in undistributed net income of
subsidiaries.................................... 5,607 11,315 4,751
------- ------- ------
Net income......................................... $11,049 $10,546 $9,441
======= ======= ======
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Statements of Cash Flows (Parent Company Only)
Years Ended December 31,
--------------------------
2000 1999 1998
------- ------- --------
(Dollars in thousands)
Cash flows from operating activities:
Net income..................................... $11,049 $10,546 $ 9,441
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................. 12 20 27
Investment securities gains, net of losses... (293) (79) --
Increase in other assets..................... (228) (393) (299)
Increase (decrease) in other liabilities..... (150) 875 447
Decrease (increase) in due from subsidiary... (626) 457 (101)
Equity in undistributed net income of
subsidiary.................................. (5,607) (11,315) (4,751)
Amortization of intangible assets............ -- -- 29
------- ------- --------
Net cash provided by operating activities...... 4,157 111 4,793
Cash flows from investing activities:
Purchases of available-for-sale securities... (207) (1,010) (488)
Sales of available-for-sale securities....... 1,559 505 240
Additions to equipment....................... (112) -- (5)
------- ------- --------
Net cash provided by (used in) investing
activities.................................... 1,240 (505) (253)
Cash flows from financing activities:
Proceeds from Trust Preferred Capital
Securities.................................. 6,000 -- --
Exercise of stock options.................... 587 478 168
Purchase of treasury stock................... (3,872) (1,982) (2,546)
Cash dividends............................... (2,812) (2,596) (2,282)
Capital contribution to subsidiary........... (2,000) -- (2,250)
------- ------- --------
Net cash used in financing activities.......... (2,097) (4,100) (6,910)
------- ------- --------
Net increase (decrease) in cash and cash
equivalents................................... 3,300 (4,494) (2,370)
Cash and cash equivalents at beginning of
year.......................................... 499 4,993 7,363
------- ------- --------
Cash and cash equivalents at end of year....... $ 3,799 $ 499 $ 4,993
======= ======= ========
51
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Oak Brook Bancshares:
We have audited the accompanying consolidated balance sheets of First Oak
Brook Bancshares, Inc. and subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the years in the three-year period ended December
31, 2000. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First Oak
Brook Bancshares, Inc. and subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
Chicago, Illinois
January 19, 2001
ITEM 9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure
Not applicable.
52
PART III
ITEM 10. Directors And Executive Officers Of The Registrant
See "Directors and Executive Officers" on pages 11 and 12 of the Company's
Proxy Statement and Notice of 2001 Annual Meeting to be filed on or before
April 1, 2001, 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 17 through 22, inclusive, of the Company's
Proxy Statement and Notice of 2001 Annual Meeting to be filed on or before
April 1, 2001, 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 8 and 9 of the Company's Proxy Statement and Notice
of 2001 Annual Meeting to be filed on or before April 1, 2001, which is
incorporated herein by reference.
ITEM 13. Certain Relationships And Related Transactions
See "Certain Transactions" on page 13 of the Company's Proxy Statement and
Notice of 2001 Annual Meeting to be filed on or before April 1, 2001, which is
incorporated herein by reference.
53
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, 2000 and 1999
Consolidated Statements of Income for each of the three years in the period
ended December 31, 2000
Consolidated Statements of Changes in Shareholders' Equity for each of the
three years in the period ended December 31, 2000
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 2000
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a) 2. FINANCIAL STATEMENT SCHEDULES
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 2000.
(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).
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, 2000, 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).
54
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) Summary Annual Report to Shareholders.
Exhibit (21) Subsidiaries of the Registrant.
Exhibit (23) Consent of KPMG LLP.
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.
55
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 19, 2001
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 19, 2001
______________________________________ Chief Executive Officer
Eugene P. Heytow
/s/ Frank M. Paris Vice Chairman of the Board March 19, 2001
______________________________________
Frank M. Paris
/s/ Richard M. Rieser, Jr. President, Assistant March 19, 2001
______________________________________ Secretary, and Director
Richard M. Rieser, Jr.
/s/ Miriam Lutwak Fitzgerald Director March 19, 2001
______________________________________
Miriam Lutwak Fitzgerald
/s/ Geoffrey R. Stone Director March 19, 2001
______________________________________
Geoffrey R. Stone
/s/ Michael L. Stein Director March 19, 2001
______________________________________
Michael L. Stein
/s/ Stuart I. Greenbaum Director March 19, 2001
______________________________________
Stuart I. Greenbaum
/s/ Robert Wrobel Director March 19, 2001
______________________________________
Robert Wrobel
/s/ John W. Ballantine Director March 19, 2001
______________________________________
John W. Ballantine
/s/ Rosemarie Bouman Vice President and Chief March 19, 2001
______________________________________ Financial Officer
Rosemarie Bouman
56