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UNITED STATES SECURITIES
AND
EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarterly period ended: June 30, 2002
Commission file number 0-14468
--------------------
FIRST OAK BROOK BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
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
(Address of principal executive offices)
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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 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
--- ---
As of August 12, 2002, 6,326,180 shares of the Company's common stock, par value
$2.00 per share, were outstanding.
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FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARIES
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets
June 30, 2002 and December 31, 2001 3
Condensed consolidated statements of income
Three and six months ended June 30, 2002 and 2001 5
Condensed consolidated statements of changes in shareholders' equity
Six months ended June 30, 2002 and 2001 7
Condensed consolidated statements of cash flows
Six months ended June 30, 2002 and 2001 8
Notes to condensed consolidated financial
statements - June 30, 2002 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Part II. Other Information
Item 1. Legal Proceedings *
Item 2. Changes in Securities *
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 26
Item 6. Exhibits and Report on Form 8-K 26
Signatures 28
* Not applicable
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2002 2001
----------- ------------
(Dollars in thousands)
Assets
Cash and due from banks $ 45,371 $ 54,097
Federal funds sold and interest bearing
deposits with banks 104,004 56,001
Securities held-to-maturity, at
amortized cost (fair value, $9,767
and $10,509 at June 30, 2002
and December 31, 2001, respectively) 9,348 10,228
Securities available-for-sale, at fair value 404,040 317,161
Loans, net of unearned discount 952,472 916,645
Less allowance for loan losses (18,201) (6,982)
----------- ----------
Net loans 934,271 909,663
---------- ----------
Premises and equipment, net 25,630 23,466
Other assets 16,015 15,935
---------- ----------
Total Assets $1,538,679 $1,386,551
========== ==========
3
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
June 30, December 31,
2002 2001
----------- ------------
(Dollars in thousands except share amounts)
Liabilities
Noninterest-bearing demand deposits $ 227,453 $ 211,939
Interest-bearing deposits:
Savings deposits and NOW accounts 145,584 136,156
Money market accounts 148,939 166,339
Time deposits
Under $100,000 346,796 293,302
$100,000 and over 353,417 270,230
---------- ----------
Total interest-bearing deposits 994,736 866,027
---------- ----------
Total deposits 1,222,189 1,077,966
Securities sold under agreements to repurchase
and other short term debt 81,320 82,013
Treasury, tax and loan demand notes 15,212 20,000
Federal Home Loan Bank borrowings 92,000 86,000
Trust Preferred Capital Securities 18,000 6,000
Other liabilities 7,313 15,020
---------- ----------
Total Liabilities 1,436,034 1,286,999
---------- ----------
Shareholders' Equity
Preferred stock, no par value, authorized--
100,000 shares, issued--none - -
Common stock, $2 par value, authorized--16,000,000 shares at
June 30, 2002 and December 31, 2001, issued--7,283,256 shares at
June 30, 2002 and December 31, 2001, outstanding--6,326,180 shares
at June 30, 2002 and 6,310,631 shares at December 31, 2001 14,567 14,567
Surplus 11,792 11,878
Accumulated other comprehensive income, net of tax 6,462 3,437
Retained earnings 81,310 81,336
Less cost of shares in treasury, 957,076 common shares
at June 30, 2002 and 972,625 common shares at December 31, 2001 (11,486) (11,666)
----------- -----------
Total Shareholders' Equity 102,645 99,552
---------- ----------
Total Liabilities and Shareholders' Equity $1,538,679 $1,386,551
========== ==========
See Notes to Condensed Consolidated Financial Statements.
4
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months Six months
ended June 30, ended June 30,
--------------------- ---------------------
2002 2001 2002 2001
------- ------- ------- --------
(Dollars in thousands, except share amounts)
Interest income:
Interest and fees on loans $14,988 $16,370 $29,711 $32,702
Interest on securities:
U.S. Treasury and Government agencies 4,296 3,894 8,297 7,822
Obligations of states and political subdivisions 571 719 985 1,422
Other securities 398 296 756 582
Interest on Federal funds sold, securities
purchased under agreements to resell
and deposits with banks 251 498 591 1,039
------- ------- ------- ------
Total interest income 20,504 21,777 40,340 43,567
------- ------- ------- -------
Interest expense:
Interest on savings deposits and NOW accounts 411 748 828 1,608
Interest on money market accounts 767 1,076 1,622 2,317
Interest on time deposits 5,593 8,070 11,133 16,285
Interest on Federal funds purchased, securities
sold under agreements to repurchase and other
short term debt 338 922 788 1,995
Interest on Treasury, tax and loan demand notes 16 131 137 389
Interest on Federal Home Loan Bank borrowings 1,350 1,307 2,642 2,565
Interest on Trust Preferred Capital Securities 170 160 331 320
------- ------- ------- -------
Total interest expense 8,645 12,414 17,481 25,479
------- ------- ------- -------
Net interest income 11,859 9,363 22,859 18,088
Provision for loan losses 10,850 325 11,350 550
------- ------- ------- -------
Net interest income after provision for loan losses $ 1,009 $ 9,038 $11,509 $17,538
------- ------- ------- -------
5
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)
(Unaudited)
Three months Six months
ended June 30, ended June 30,
--------------------- ---------------------
2002 2001 2002 2001
------- ------ ------- ------
(Dollars in thousands, except share amounts)
Other income:
Service charges on deposit accounts $ 1,846 $1,467 $ 3,593 $2,838
Investment management and trust fees 434 389 815 700
Merchant card processing fees 1,193 928 2,310 1,674
Fees on mortgages sold, net of commissions 80 150 276 210
Income from revenue sharing agreement 225 225 450 450
Other operating income 390 283 714 713
Investment securities gains, net of losses 307 - 315 234
------- ------ ------- ------
Total other income 4,475 3,442 8,473 6,819
------- ------ ------- ------
Other expenses:
Salaries and employee benefits 5,224 4,472 10,337 8,994
Occupancy expense 540 521 1,065 1,020
Equipment expense 476 498 940 993
Data processing 385 380 805 721
Professional fees 532 213 767 386
Postage, stationery and supplies 272 221 539 453
Advertising and business development 435 403 853 782
Merchant card interchange expense 945 732 1,799 1,340
Other operating expenses 445 397 872 735
------- ------ ------- ------
Total other expenses 9,254 7,837 17,977 15,424
------- ------ ------- ------
Income (loss) before income taxes (3,770) 4,643 2,005 8,933
Income tax expense (benefit) (1,441) 1,429 371 2,736
-------- ------ ------- ------
Net income (loss) $(2,329) $3,214 $ 1,634 $6,197
======= ====== ======= ======
Basic earnings (loss) per share $ (.37) $ .51 $ .26 $ .98
======= ====== ======= ======
Diluted earnings (loss) per share $ (.37) $ .50 $ .25 $ .96
======= ====== ======= ======
See Notes to Condensed Consolidated Financial Statements.
6
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Accumulated
Other Total
Common Comprehensive Retained Treasury Shareholders'
Stock Surplus Income Earnings Stock Equity
------- ------- ------------- -------- -------- -------------
(Dollars in thousands)
Six Months Ended June 30, 2002
- ------------------------------
Balance at January 1, 2002 $14,567 $11,878 $3,437 $81,336 $(11,666) $ 99,552
Comprehensive income:
Net Income 1,634 1,634
Unrealized holding gain during
the period, net of
reclassification adjustment 3,025 3,025
--------
Total comprehensive income 4,659
Dividends declared (1,660) (1,660)
Issuance of notes receivable on
exercised options (300) (300)
Exercise of stock options,
net of tax benefit 214 180 394
------- ------- ------ ------- -------- --------
Balance at June 30, 2002 $14,567 $11,792 $6,462 $81,310 $(11,486) $102,645
======= ======= ====== ======= ======== ========
Six Months Ended June 30, 2001
- ------------------------------
Balance at January 1, 2001 $14,567 $11,849 $1,410 $70,593 $(10,813) $ 87,606
Comprehensive income:
Net Income 6,197 6,197
Unrealized holding gain during
the period, net of
reclassification adjustments 2,802 2,802
--------
Total comprehensive income 8,999
Dividends declared (1,392) (1,392)
Exercise of stock options,
net of tax benefit 28 181 209
Purchase of treasury stock (797) (797)
------- ------- ------ ------- -------- --------
Balance at June 30, 2001 $14,567 $11,877 $4,212 $75,398 $(11,429) $ 94,625
======= ======= ====== ======= ======== ========
See Notes to Condensed Consolidated Financial Statements.
7
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months
ended June 30,
-----------------------------
2002 2001
---- ----
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 1,634 $ 6,197
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, accretion and amortization 1,299 1,314
Provision for loan losses 11,350 550
Net gains on investment securities (315) (234)
Proceeds from sale of Broadview property - 300
Gain on sale of Broadview property - (172)
Decrease from revenue sharing agreement (28) (126)
FHLB stock dividend (148) (226)
Origination of real estate loans for sale (21,610) (28,221)
Gain on sale of mortgage loans originated for sale (429) (313)
Proceeds from sale of real estate loans originated for sale 25,351 27,249
Increase in other assets (55) (249)
Decrease in other liabilities (9,264) (27)
--------- ---------
Net cash provided by operating activities 7,785 6,042
--------- --------
Cash flows from investing activities:
Securities held-to-maturity:
Purchases (2,500) (1,800)
Proceeds from maturities, calls and paydowns 3,383 10,105
Securities available-for-sale:
Purchases (269,952) (60,920)
Proceeds from maturities, calls and paydowns 101,580 32,365
Proceeds from sales 86,403 29,406
Increase in loans (39,270) (26,650)
Purchases of premises and equipment (3,328) (714)
--------- --------
Net cash used in investing activities (123,684) (18,208)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in non-interest-bearing demand deposits 15,514 (31,882)
Increase in interest-bearing deposit accounts 128,709 69,508
Increase (decrease) in short term borrowing obligations (5,481) 6,752
Proceeds from Federal Home Loan Bank borrowings 6,000 5,000
Proceeds from Trust Preferred Capital Securities 12,000 -
Purchase of treasury stock - (797)
Issuance of notes receivable on options exercised (300) -
Exercise of stock options 394 209
Cash dividends (1,660) (1,392)
--------- --------
Net cash provided by financing activities 155,176 47,398
--------- --------
Net increase in cash and cash equivalents 39,277 35,232
Cash and cash equivalents at beginning of period 110,098 71,050
--------- --------
Cash and cash equivalents at end of period $ 149,375 $106,282
========= ========
Supplemental disclosures:
Interest paid $ 22,214 $ 26,582
Income taxes paid 5,000 2,860
Transfer of securities available-for-sale
from held-to-maturity $ - $ 76,131
========= ========
See Notes to Condensed Consolidated Financial Statements.
8
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(Unaudited)
1. Basis of Presentation:
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), FOBB Statutory Trust I and FOBB Statutory Trust
II. 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 Company formed a wholly owned subsidiary in the second quarter of
2002, FOBB Statutory Trust II, for the purpose of participating in a
Pooled Trust Preferred Program. See the section titled "Capital" for
further discussion regarding this program.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information
and with the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the
United States of America for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring items)
considered necessary for a fair presentation have been included. Operating
results for the three and six month periods ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 2002. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 2001.
2. Financial Instruments With Off Balance Sheet Risk:
In the normal course of business, there are various outstanding
commitments and contingent liabilities, including commitments to extend
credit, standby letters of credit and commercial letters of credit
(collectively "commitments"), which are appropriately 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 is limited to their contractual amount.
Many commitments expire without being used. Commitments to extend credit
are agreements to lend funds to a customer as long as there is no
violation of any condition established in the contract. Performance
standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
Financial standby letters of credit are conditional guarantees of payment
to a third party on behalf of a customer of the Company. Therefore, the
amounts stated below do not necessarily represent future cash commitments.
These commitments are subject to the same credit policies as followed for
loans recorded in the financial statements.
9
The summary of these commitments to extend credit follows (in thousands):
June 30, December 31,
2002 2001
----------------------------------------
Commercial loans $101,561 $119,832
Real estate:
Construction, land acquisition
and development loans 65,061 74,150
Home equity loans 127,492 126,514
Check credit 897 878
Performance standby letters of credit 11,295 13,122
Financial standby letters of credit 5,290 6,897
-------- --------
Total commitments $311,596 $341,393
======== ========
3. Earnings per Share:
Basic earnings (loss) per share (EPS), is computed by dividing net income
(loss) 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. In the case of a net loss, there is no dilutive
effect of stock options on EPS.
The following table sets forth the denominator used for basic and diluted
earnings (loss) per share for the periods ended June 30, 2002 and 2001
(dollars in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
--------------------------- ------------------------
Net income (loss) $(2,329) $3,214 $1,634 $6,197
========= ========= ========= =========
Denominator for basic earnings
per share - weighted average
shares outstanding 6,337,027 6,332,887 6,332,343 6,341,212
Effect of diluted securities:
Stock options issued to
employees and directors - 94,515 171,045 92,640
--------- --------- --------- ---------
Denominator for diluted
earnings per share 6,337,027 6,427,402 6,503,388 6,433,852
========= ========= ========= =========
Earnings (loss) per share:
Basic $(.37) $.51 $.26 $.98
Diluted $(.37) $.50 $.25 $.96
========= ========= ========= =========
Weighted average options outstanding that were not included in the
denominator for diluted earnings per share totaled 560,972 and 2,517 for
the three and six month periods ending June 30, 2002, respectively, as
their effect would be antidilutive. Since the
10
Company recorded a net loss for the three months ended June 30, 2002, all
options outstanding are considered antidilutive. Weighted average options
totaling 42,644 and 42,122 were antidilutive for the three and six month
periods ending June 30, 2001, respectively.
4. Loans
The following table indicates loans outstanding, as of the dates indicated
(dollars in thousands):
June 30, December 31,
2002 2001
-----------------------------------
Commercial loans $138,531 $146,691
Real estate loans:
Construction, land acquisition and development 104,333 102,594
Commercial mortgage 237,633 213,689
Residential mortgage 106,317 105,168
Home equity 115,427 112,877
Indirect vehicle loans 239,673 224,311
Consumer loans 10,578 11,353
-------- --------
Total loans 952,492 916,683
Less unearned discount (20) (38)
-------- ---------
Loans, net of unearned discount $952,472 $916,645
======== =========
The construction, land acquisition and development loans represent loans
for the following purposes: approximately 63% are for construction of 1-4
family detached homes, condominiums and townhouses in the Chicago
metropolitan area; approximately 22% are for retail developments; 6%
represent rental multi-family residential projects; 6% are for industrial
buildings and the remaining 3% are for hotel and office properties.
5. New Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards No. 141,
Business Combinations (FAS 141) and No. 142, Goodwill and Other Intangible
Assets (FAS 142) on January 1, 2002. FAS 141 requires that all business
combinations initiated after June 30, 2001 be accounted for under the
purchase method and addresses the initial recognition and measurement of
goodwill and other intangible assets required in a business combination.
FAS 142 addresses the initial recognition and measurement of intangible
assets acquired outside of a business combination and the accounting for
goodwill and other intangible assets subsequent to their acquisition. FAS
142 provides that intangible assets with finite useful lives be amortized
and that goodwill and intangible assets with indefinite lives will not be
amortized, but will rather be tested at least annually for impairment. As
the Company has no recorded goodwill, the adoption of FAS 141 and FAS 142
had no impact on the financial position or results of operation of the
Company.
6. Restatement and Reclassification
Certain amounts in the June 30, 2001 interim condensed consolidated
financial statements have been reclassified to conform to their 2002
presentation.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Earnings Highlights-Second Quarter Results
The Company recorded a net loss for the second quarter of 2002 of $2,329,000
compared with net income of $3,214,000 earned in the second quarter of 2001. The
basic loss per share for the second quarter of 2002 was $.37 as compared to
earnings per share of $.51 for 2001, while the diluted loss per share was $.37
for 2002 compared with earnings per share of $.50 for 2001.
Key performance indicators for the second quarter of 2002 showed an annualized
return on average assets (ROA) of a negative .65% compared to a positive ROA of
1.01% in 2001. The annualized return on average shareholders' equity (ROE) for
the second quarter of 2002 was a negative 9.15% compared to a positive ROE of
13.89% for the second quarter of 2001.
The net loss is due to a special $10.35 million provision to the allowance for
loan losses occasioned by an apparent loan fraud. The Company's net income was
adversely impacted by $6.8 million as a result of this event. Additional
information regarding this loan is provided hereafter under the heading "Asset
Quality".
Excluding the $6.8 million after-tax effect of the special provision, net income
would have been $4,502,000 million for the second quarter of 2002, an increase
of 40% as compared to 2001. Diluted earnings per share would have been $.69 for
the second quarter of 2002, up 38%. ROA would have been 1.26% and ROE would have
been 17.67% for the second quarter 2002.
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, on a tax-equivalent basis,
increased $2,431,000 or 25% as compared to the second quarter of 2001. This
increase is attributable to a 12% increase in average interest earning assets
complemented by a 37 basis point increase in the net interest margin to 3.58% in
the second quarter of 2002 from 3.21% for the same period last year. The
increase in net interest income and the net interest margin was primarily the
result of the following:
.. The yield on average earning assets decreased 120 basis points to 6.13%
while the cost of deposits and other borrowed funds decreased 193 basis
points to 3.13% for the second quarter of 2002. The Federal Reserve reduced
interest rates eleven times in 2001 for a total of 475 basis points. Since
the Company's deposits and other interest bearing liabilities re-priced
downward more quickly than its loans and investments, the margin benefited
from the reduction in interest rates.
.. Total average earning assets increased $148.3 million or 12%, as compared
to 2001. Average loans for the second quarter of 2002 grew $90.7 million or
11%, in comparison to the second quarter of 2001. The increase is primarily
attributable to growth in commercial real estate mortgage loans ($46.2
million), construction loans ($42.2 million), home equity loans ($9.6
million) and indirect vehicle loans ($15.6 million) offset by decreases in
residential loans ($15.4 million). See the Average Loans by Type and Yield
table for further details.
12
. The Company's average securities portfolio increased by $44.2 million
primarily due to growth in the U.S. Government Agency securities
($56.5 million) and corporate and other securities ($6.7 million)
offset by decreases in U.S. Treasury ($8.0 million) and municipal
securities ($11.0 million).
. Average interest-bearing liabilities increased $125.1 million or 13%,
as compared to the second quarter of 2001. Average interest-bearing
deposits increased $119.9 million primarily due to the promotion of
the new Advanced Interest CD product launched late in the first
quarter of 2002 and to a lesser extent the opening of the Bolingbrook
office in 2002. The Advanced Interest CD product pays interest up
front, rather than in arrears.
Average balances and effective interest yields and rates on a tax equivalent
basis for the second quarter of 2002 and 2001 were as follows (dollars in
thousands):
Three months ended Three months ended
June 30, 2002 June 30, 2001
--------------------------------- ---------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
Federal funds sold and interest
bearing deposits with banks $ 57,944 $ 251 1.74% $ 44,545 $ 498 4.48%
Securities/1/ 360,991 5,496 6.11 316,773 5,190 6.57
Loans/1,2/ 939,201 15,011 6.41 848,537 16,408 7.76
---------- ------- ----- ---------- -------- -----
Total earning assets/
interest income $1,358,136 $20,758 6.13% $1,209,855 $ 22,096 7.33%
Cash and due from banks 42,756 40,996
Other assets 39,535 37,405
Allowance for loan losses (7,995) (5,984)
---------- ----------
Total average assets $1,432,432 $1,282,272
========== ==========
Interest-bearing deposits $ 922,877 $ 6,771 2.94% $ 802,999 $ 9,894 4.94%
Short-term debt 89,630 354 1.58 88,986 1,053 4.75
FHLB borrowings 89,890 1,350 6.02 86,000 1,307 6.09
Trust Preferred Capital Securities 6,659 170 10.29 6,000 160 10.74
---------- ------- ----- ---------- -------- -----
Total interest-bearing liabilities/
interest expense $1,109,056 $ 8,645 3.13% $ 983,985 $ 12,414 5.06%
Demand deposits 209,565 190,935
Other liabilities 11,647 14,560
---------- ----------
Total liabilities $1,330,268 $1,189,480
Shareholders' equity 102,164 92,792
---------- ----------
Total liabilities and
shareholders' equity $1,432,432 $1,282,272
========== ==========
Net interest income/1//spread $12,113 3.00% $ 9,682 2.27%
======= ===== ======== =====
Net interest margin/1/ 3.58% 3.21%
===== =====
- --------------------------
/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%.
/2/ Nonaccrual loans are included in the average balance.
13
Average Loans by type and yield for the second quarter
(Dollars in thousands)
2002 2001
---------------------------------------------------
Amount Yield Amount Yield
---------------------------------------------------
Commercial loans /1/ $139,372 6.06% $145,917 7.69%
Real estate loans:
Construction, land acquisition and development loans /2/ 106,622 5.71 64,373 7.82
Commercial mortgage loans 227,194 7.10 181,035 8.52
Residential mortgage loans 106,932 6.76 122,333 7.21
Home equity loans 113,614 4.82 104,036 7.23
Indirect vehicle loans 234,971 6.84 219,405 7.66
Consumer loans 10,496 7.43 11,438 8.69
-------- ---- -------- ----
Total Loans/1,2/ $939,201 6.41% $848,537 7.76%
======== ===== ======== ====
The Company recorded a provision for loan losses of $10,850,000 for the second
quarter of 2002 as compared to $325,000 for the second quarter of 2001. The
increase is due primarily to a special $10.35 million provision specifically
related to one construction loan. See "Asset Quality" for additional information
relating to the construction loan. The remainder of the increase is due to a
weakening economy, an increase in other nonperforming loans, and growth in the
commercial construction and commercial mortgage loan portfolios.
Total other income increased $1,033,000 or 30%. Excluding the net gains on sales
of investment securities in 2002, other income increased 21%. Service charges on
deposit accounts increased $379,000 primarily due to an increase in service fees
earned in the Company's Treasury Management business. Treasury Management
customers have the option of paying for their services either by maintaining
noninterest bearing deposit balances or paying in cash. The amounts presented
here represent cash fees paid by our Treasury Management customers. These cash
fees increased primarily due to a slight increase in pricing and more customers
paying a portion of their fees in cash. As interest rates drop so does the value
assigned to deposit balances. Therefore, in a low interest rate environment
(like we are currently experiencing), cash fees are expected to rise; whereas in
a higher interest rate environment, the value of deposit balances cover more of
the service charges and cash fees tend to decline. Total Treasury Management
service charges, both cash and balance equivalents, increased 5% as compared to
the second quarter of 2001. Included in this category is one significant
customer, which is under contract with the Bank until June of 2003.
Investment management and trust fees increased $45,000 primarily due to new
trust business. Discretionary assets under management reached $390 million at
June 30, 2002, up from $320 million at June 30, 2001.
Merchant card processing fees increased $265,000 primarily due to new merchant
accounts and higher sales volume. The number of merchant outlets at June 30,
2002 increased to 410 as compared to 345 at June 30, 2001. Merchant interchange
expense (in other operating expenses) rose $213,000 as compared to the second
quarter of 2001.
- -------------
/1/ Tax equivalent basis. Average yield on tax exempt
loans include the effects of tax equivalent adjustments using a tax rate of 34%.
/2/ Nonaccrual loans are included in the average balance.
14
Fees on mortgages sold with servicing released decreased $70,000 as compared to
the second quarter of 2001. The Company originated a total of $22.2 million in
mortgage loans in the second quarter of 2002, of which $9.8 million were sold.
During the same period of 2001, the Company originated $20.9 million in mortgage
loans, of which $18.9 million were sold. Fees from mortgages sold tapered off
due to the Company retaining a larger percentage of loans for its own portfolio.
Fee income is shown net of 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 $225,000. Under the
agreement, the Company shared in the revenue from the sold portfolio for the
five years ending June 30, 2002. Since the contractual term has expired, the
Company will no longer be receiving income from this source.
Other operating income increased $107,000 due to an increase in mutual fund
sweep fees and income related to a covered call option. The Company wrote a
covered call option against a U.S. Government Agency security with a book value
of $10 million to enhance the overall return on the security. There were no
outstanding call options at June 30, 2002.
The Company recorded net gains on the sales of investment securities of $307,000
in 2002. These gains were from the sales of $50 million of U.S. Government
Agency securities that were priced at a premium but were expected to be called.
The proceeds were reinvested in callable securities with longer maturities.
There were no sales of investment securities in the second quarter of 2001.
Total other expenses increased $1,417,000 or 18%. Annualized operating expenses
as a percentage of average assets increased to 2.6% for 2002 compared with 2.4%
for 2001. Annualized net overhead expenses as a percentage of average assets
were 1.4% for 2002 compared to 1.5% for 2001. The increase in operating expenses
was primarily due to new positions and salary increases, professional fees
related to the apparent loan fraud, higher merchant card interchange expense,
and costs associated with the Bolingbrook branch that opened in March 2002. The
efficiency ratio (other expenses divided by net interest income and other
income) improved to 56.7% in 2002 as compared to 61.2% in 2001.
Earnings Highlights-Six Month Results
Net income for the six months ended June 30, 2002 was $1,634,000, compared with
$6,197,000 earned in 2001. Basic earnings per share for the first six months of
2002 were $.26 as compared to $.98 earned in 2001, while diluted earnings per
share were $.25 in 2002 as compared to $.96 in 2001.
Key performance indicators for the six-month period show an annualized ROA of
..23% for 2002 compared with .99% for 2001. The annualized ROE for 2002 was 3.24%
compared with 13.70% for 2001.
Excluding the $6.8 million after-tax effect of the special provision to the
allowance for loan losses in the second quarter of 2002, net income for the
first six months of 2002 would have been $8,465,000 million, up 37% from 2001.
Diluted earnings per share would have been $1.30, up 35% from 2001. ROE would
have been 16.77%, and ROA would have been 1.21% for the first half of 2002.
15
Net interest income for the first six months of 2002, on a tax equivalent basis,
increased $4,577,000 or 24%. This increase is due to a 12% increase in average
earning assets and a 37 basis point increase in the net interest margin to 3.52%
in 2002 from 3.15% in 2001. The increase in net interest income and the net
interest margin was primarily the result of the following:
.. The yield on average earning assets decreased 128 basis points to 6.16%
while the cost of deposits and other borrowed funds decreased 205 basis
points to 3.24% for the first six months of 2002. Since the Company's
deposits and other interest bearing liabilities repriced downward more
quickly than its loans and investments, the margin improved. The margin
continued to benefit in 2002 from Federal Reserve interest rate reductions
during 2001.
.. Total average earning assets increased $138.8 million or 12% as compared to
2001. Average loans for the first six months of 2002 grew $77.9 million or
9%, in comparison to the first six months of 2001. The increase is
primarily attributable to growth in construction loans ($45.3 million),
commercial real estate ($34.0 million), indirect vehicle loans ($12.0
million) and home equity loans ($9.5 million) offset by a decrease in
residential loans ($20.3 million). See the Average Loans by Type and Yield
table for more details.
.. The Company's average security portfolio increased $33.1 million primarily
due to the growth in U.S. Government Agency securities ($44.3 million) and
corporate and other securities ($7.3 million) offset by decreases in U.S.
Treasury ($9.1 million) and municipal ($9.4 million) securities.
.. Average interest-bearing liabilities increased $117.3 million or 12% as
compared to the first six months of 2001. Average interest-bearing deposits
increased $105.3 million due to retail deposit promotions of the new
Advanced Interest CD product, and to a lesser extent, the opening of the
Bolingbrook office in 2002. In addition, average FHLB borrowings and
short-term debt increased.
16
Average balances and effective interest yields and rates on a tax equivalent
basis for the first six months of 2002 and 2001 were as follows (dollars in
thousands):
2002 2001
---------------------------------------- ----------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- -------- ----- ------- -------- ------
Federal funds sold and interest bearing
deposits with banks $ 69,242 $ 591 1.72% $ 41,494 $ 1,039 5.05%
Securities /1/ 347,640 10,433 6.05 314,502 10,381 6.66
Loans /1, 2/ 919,208 29,754 6.53 841,291 32,779 7.86
---------- ------- ----- ---------- ------- -----
Total earning assets/interest income $1,336,090 $40,778 6.16% $1,197,287 $44,199 7.44%
Cash and due from banks 44,350 40,633
Other assets 38,788 36,957
Allowance for loan losses (7,603) (5,887)
----------- -----------
Total average assets $1,411,625 $1,268,990
========== ==========
Interest-bearing deposits $ 894,465 $13,583 3.06% $ 789,157 $20,210 5.16%
Short-term debt 100,520 925 1.86 91,882 2,384 5.23
FHLB borrowings 87,956 2,642 6.06 84,978 2,565 6.09
Trust Preferred Capital Securities 6,331 331 10.56 6,000 320 10.79
---------- ------- ----- ---------- ------- -----
Total interest-bearing liabilities/
interest expense $1,089,272 $17,481 3.24% $ 972,017 $25,479 5.29%
Demand deposits 208,013 191,873
Other liabilities 12,535 13,872
---------- ----------
Total liabilities $1,309,820 $1,177,762
Shareholders' equity 101,805 91,228
---------- ----------
Total liabilities and shareholders'
equity $1,411,625 $1,268,990
========== ==========
Net interest income /1/spread $23,297 2.92% $ 18,720 2.15%
======= ===== ======== =====
Net interest margin /1/ 3.52% 3.15%
===== =====
- --------
/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%.
/2/ Nonaccrual loans are included in the average balance.
17
Average loans by type and yield for the six months ended June 30,
(Dollars in thousands)
2002 2001
-------------------------------------
Amount Yield Amount Yield
-------------------------------------
Commercial loans/1/ $141,170 6.04% $142,935 8.00%
Real estate loans:
Construction, land acquisition
and development loans/2/ 102,264 5.95% 56,990 8.30%
Commercial real estate loans 217,092 7.27% 183,069 8.43%
Residential mortgage loans 104,741 6.93% 125,000 7.27%
Home equity loans 112,737 4.82% 103,193 7.67%
Indirect vehicle loans 230,546 6.99% 218,572 7.55%
Consumer loans 10,658 7.43% 11,532 8.77%
-------- ---- -------- ----
Total Loans/1,2/ $919,208 6.53% $841,291 7.86%
======== ==== ======== ====
The Company recorded a provision for loan losses of $11,350,000 for the first
six months of 2002 compared to $550,000 for the first six months of 2001. This
increase was primarily due to a $10,350,000 special provision described further
in "Asset Quality". The remainder of the increase is due to a weakening economy,
an increase in other nonperforming loans, and growth in the commercial
construction and commercial mortgage loan portfolios.
Total other income increased $1,654,000 or 24%. Excluding the net gains on the
sales of investment securities and the gain on the sale of the Broadview
drive-thru in 2001 of $172,000, other income increased 27%. Service charges on
deposit accounts increased $755,000 primarily due to an increase in service fees
earned in the Company's Treasury Management business. Treasury Management
customers have the option of paying for their services either by maintaining
noninterest bearing deposit balances or paying in cash. The amounts presented
here represent cash fees paid by our Treasury management customers. These cash
fees increased primarily due to a slight increase in pricing and more customers
paying a portion of their fees in cash. As interest rates drop so does the value
assigned to deposit balances. Therefore, in a low interest rate environment
(like we are currently experiencing), cash fees are expected to rise; whereas in
a higher interest rate environment, the value of deposit balances cover more of
the service charges and cash fees tend to decline. Total Treasury Management
service charges, both cash and balance equivalents increased 4% for the first
six months of 2002 as compared to the same period of 2001. Included in this
category is one significant customer, which is under contract with the Bank
until June 2003.
Investment management and trust fees increased $115,000 due primarily to new
customers and an increase in the discretionary assets under management.
Merchant card processing fees increased $636,000 primarily due to new merchant
accounts and higher sales volume. Merchant interchange expense (in other
operating expenses) rose $459,000 as compared to the same period of 2001.
- ---------------------
/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%.
/2/ Nonaccrual loans are included in the average balance.
18
Fees on mortgages sold with servicing released, increased $66,000 as compared to
the first six months of 2001. Although the dollar value of sold loans declined,
the Bank earns slightly more in overages in a declining rate environment. As a
result of lower interest rates, the residential mortgage loan refinance market
improved beginning in late 2001 and continuing during the first half of 2002.
The Company originated a total of $50.0 million in mortgage loans through June
2002, of which $25.4 million were sold. During the same period of 2001, the
Company originated $33.9 million of mortgage loans, of which $27.2 million were
sold. Fee income is shown net of commissions paid to the mortgage originators.
Excluding the gain on the sale of the Broadview drive-thru of $172,000 in 2001,
other operating income increased primarily due to an increase in mutual fund
sweep fees attributable to increased volume and income related to a covered call
option transaction.
The Company recorded net security gains of $315,000 in 2002, compared to gains
of $234,000 in 2001. The gains in 2002 were from the sales of $50 million in
U.S. Government Agency securities that were expected to be called and $1 million
in corporate and other securities. The gains in 2001 were from the sales of $9
million in U.S. Government Agency securities and $.5 million in corporate and
other securities.
Total other expenses increased $2,553,000 or 17%. Annualized operating expenses
as a percentage of average assets increased to 2.6% for 2002 compared with 2.4%
for 2001. Annualized net overhead expenses as a percentage of average assets
decreased to 1.4% for 2002 compared to 1.5% for 2001. The efficiency ratio
(other expenses divided by net interest income and other income) improved to
57.4% in 2002 as compared to 61.9% in 2001. The increase in operating expenses
was primarily due to new positions and salary increases, increased professional
fees primarily due to the apparent loan fraud, higher merchant card interchange
expense, and new costs associated with the Bolingbrook branch that opened in
March 2002.
Asset Quality
Nonperforming assets (nonaccrual loans, renegotiated loans, loans past due 90
days or more and still accruing, other real estate owned and repossessed
vehicles) totaled $19,196,000 at June 30, 2002 and $1,878,000 at December 31,
2001. Nonaccrual loans consist primarily of two commercial real estate
construction loans. One is a commercial real estate construction loan with a
balance of $1,326,000 on a partially completed hotel in Burr Ridge, Illinois.
The property was auctioned through the bankruptcy court in May 2002; however,
the bankruptcy judge later voided the sale. The Bank is currently recanvassing
potential purchasers in an effort to sell the hotel property.
The other nonaccrual loan is a commercial real estate construction loan to
develop a luxury, high rise condominium in Chicago's River North neighborhood,
which has an outstanding balance of $17,063,000. The unfinished project is now
in Company-initiated foreclosure and court receivership, following the maturity
of the mortgage and subsequent discovery of an apparent fraud by the borrowers.
The Company continues to evaluate alternatives relating to the project and
intends to vigorously pursue recovery, including claims under the Bank's
insurance bond.
A criminal complaint was filed on July 11, 2002 against two of the condominium
developers in the U.S. District Court for the Northern District of Illinois
alleging, among other things, a scheme to defraud Oak Brook Bank.
19
While the Company has established a specific allocation in its allowance for
loan losses of $10.35 million related to this loan, the Company did not
charge-off any portion of the loan in the second quarter. The Company
anticipates that a charge-off will be recorded once a determination is made with
respect to the disposition of the project. It remains too early to evaluate
recovery prospects and no assurances can be given about the amount or timing
thereof.
Upon detecting the loan irregularities, the Bank engaged a team of specialists
from KPMG LLP to review all of the Bank's commercial construction loans and
engaged RSM McGladrey, Inc. to review all other commercial loan relationships
with outstanding balances over $1 million. These reviews, which occurred late in
the second quarter, did not identify any losses from other borrowers.
As a result of the special provision, the Company's allowance for loan losses
rose to $18.2 million at June 30, 2002, or 1.91% of loans outstanding and .96x
nonperforming loans. Management believes the allowance for loan losses is at an
adequate level commensurate with the risks inherent in the loan portfolio.
Net charge-offs for the first six months of 2002 totaled $131,000 compared to
$72,000 in 2001. Virtually all charge-offs relate to the Company's $231 million
(average balance) indirect auto and Harley-Davidson motorcycle portfolio.
Losses on repossessed vehicles are charged off to the allowance when title is
taken and the vehicle is valued. At that time, they are not included in loans
but are classified as other assets on the balance sheet and typically are sold
within 90 days.
The following table summarizes the Company's nonperforming assets (in
thousands):
June 30, December 31,
2002 2001
------------------------------
Nonaccrual $18,399 $1,295
Loans which are past due 90 days or
more and still accruing 529 437
------- ------
Total nonperforming loans 18,928 1,732
Other real estate owned - -
Repossessed vehicles 268 146
------- ------
Total nonperforming assets $19,196 $1,878
======= ======
Nonperforming loans to loans outstanding 1.99% .19%
Nonperforming assets to total assets 1.25% .14%
Allowance for loan losses to nonperforming loans .96x 4.03x
Allowance for loan losses to loans outstanding 1.91% .76%
Net chargeoffs to average loans outstanding (annualized) .03% .03%
20
Capital
Shareholders' equity totaled $102.6 million at June 30, 2002. The Company and
the Bank's Tier 1, total risk-based capital and leverage ratios are in excess of
minimum regulatory guidelines and also exceed the FDIC criteria for "well
capitalized" banks. The following table shows the capital ratios of the Company
and the Bank as of June 30, 2002 and the minimum ratios for "adequately
capitalized" and "well capitalized".
Capital Required To Be
--------------------------------------
Adequately
Actual Capitalized Well Capitalized
----------------- ---------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
----------------- ---------------- ------------------
As of June 30, 2002:
Total Capital (to Risk Weighted Assets)
Consolidated $127,527 11.92% $85,606 8% $107,008 10%
Oak Brook Bank 122,726 11.50 85,404 8 106,756 10
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 114,183 10.67 42,803 4 64,205 6
Oak Brook Bank 109,382 10.25 42,702 4 64,053 6
Tier 1 Capital (to Average Assets)
Consolidated 114,183 7.97 57,297 4 71,622 5
Oak Brook Bank 109,382 7.64 57,234 4 71,543 5
During the second quarter of 2002, the Company issued $12 million of Trust
Preferred Capital Securities that were part of a $520 million Pooled Trust
Preferred Offering distributed in an institutional private placement. The
securities bear a variable interest rate of 90-day LIBOR plus 3.45%, initially
5.34%, mature on June 26, 2032 and are noncallable for 5 years. The Trust
Preferred Capital Securities are recorded in the consolidated financial
statements as long term debt and included as Tier 1 capital for regulatory
purposes. Interest on the securities is currently tax deductible. Of the $12
million in proceeds, $8 million was invested as additional capital in the Bank
and the remainder has been retained by the Company for general corporate
purposes. The Company has a total of $18 million in Trust Preferred Capital
Securities outstanding as of June 30, 2002.
During the first quarter of 2002, the Company made $300,000 in market rate loans
to certain executive vice presidents of the Bank to exercise stock options
granted under the 2001 Stock Option Plan. The notes receivable earn interest at
4.58% (the IRS medium term rate), have a term of five years, and can be prepaid
by the borrower. The loans are full recourse to the borrowers and are secured by
10,821 shares of the Company's common stock. The exercise of the stock options
shows as an addition to capital and the notes receivable are shown as a
reduction to capital.
In 2000 the Board of Directors authorized a stock repurchase program which
allows (but does not require) the Company to repurchase 200,000 shares (or
approximately 3% of outstanding shares) of common stock through August 2003 (as
extended). Repurchases can be made in the open market or through negotiated
transactions from time to time depending on market conditions. The repurchased
stock is held as treasury stock to be used for general corporate purposes. No
shares were purchased in the first six months of 2002 and approximately 104,000
shares remain available to be repurchased under the program.
21
The market price of the Company's common stock at June 30, 2002 was $31.57 with
a book value of $15.74 per share. The ratio of the Company's price to the last
12 months earnings was 22.39x.
During the first six months of 2002, the Company paid dividends of $.24 per
share. The dividend payout ratio on six month earnings was 101.59% for 2002
compared to 22.46% for 2001. On July 16, 2002 the Company declared a cash
dividend of $.1425 payable on October 18, 2002, to shareholders of record as of
October 7, 2002.
Liquidity
Effective management of balance sheet liquidity is necessary to fund growth in
earning assets and to pay liability maturities, depository customers' withdrawal
requirements, shareholders' dividends, as well as to purchase treasury shares
under the stock repurchase program.
The Parent Company and the Bank have numerous sources of liquidity including a
significant portfolio of shorter term assets, readily marketable investment
securities, the ability to attract consumer time deposits and access to various
borrowing arrangements. Available borrowing arrangements are summarized as
follows:
Oak Brook Bank:
. Federal funds lines aggregating $123 million with seven correspondent
banks, subject to continued good financial standing. As of June 30,
2002, all $123 million was available for use under these lines.
. Reverse repurchase agreement lines with five brokerage firms based on
the pledge of specific collateral and continued good financial
standing of the Bank. As of June 30, 2002, approximately $122 million
was available to the Bank under these lines.
. Advances from the Federal Home Loan Bank of Chicago based on the
pledge of specific collateral and FHLB stock ownership. As of June 30,
2002, approximately $500,000 remains available to the Bank under the
FHLB agreements without the pledge of additional collateral.
. The Bank has a borrowing line of approximately $213 million at the
discount window of the Federal Reserve Bank, subject to the
availability of collateral.
Parent Company:
. The Parent Company has a revolving credit arrangement for $15 million.
The line was unused at June 30, 2002. The maturity date of the line
was recently extended to April 1, 2003 and is anticipated to continue
to be renewed annually.
. The Parent Company also has cash, short-term investments and other
marketable securities totaling $6.4 million at June 30, 2002.
Interest Rate Sensitivity
The business of the Company and the composition of its balance sheet consists of
investments in interest earning assets (primarily loans and investment
securities) which are primarily funded by
22
interest bearing liabilities (deposits and borrowings). Such financial
instruments have varying levels of sensitivity to changes in market rates of
interest. The net income of the Company depends, to a substantial extent, on the
differences between the income the Company receives from loans, investment
securities, and other earning assets and the interest expense it pays to obtain
deposits and other liabilities. These rates are highly sensitive to many factors
that are beyond the control of the Company, including general economic
conditions and the policies of various governmental and regulatory authorities.
In addition, since the Company's primary source of interest bearing liabilities
is customer deposits, the Company's ability to manage the types and terms of
such deposits may be somewhat limited by customer preferences and local
competition in the market areas in which the Company operates.
The Company manages its overall interest rate sensitivity through various
measurement techniques including rate shock analysis. In addition, as part of
the risk management process, asset liability management policies are established
and monitored by management. The policy objective is to limit the change in
annual net interest income to 10% from an immediate and sustained parallel
change in interest rates of 200 basis points.
The rate shock analysis assesses the risk of changes in annual net interest
income in the event of an immediate and sustained parallel change in market
rates of 25 to 200 basis points. The interest rate sensitivity presented
includes assumptions that (i) the composition of the Company's interest
sensitive assets and liabilities existing at period end will remain constant
over the measurement period and (ii) that changes in market interest rates are
parallel and instantaneous across the yield curve. This analysis is limited by
the fact that it does not include any balance sheet repositioning actions the
Company may take should severe movements in interest rates occur such as
lengthening or shortening the duration of the securities portfolio. These
actions would likely reduce the variability of net interest income in extreme
interest rate shock forecasts.
The tables below present the Company's projected changes in net interest income
for various rate shock levels at June 30, 2002 and December 31, 2001. These
projections should not be relied upon as indicative of actual results. (Dollars
in thousands.)
June 30, 2002
-100bp -25bp +25bp +100bp
----------------------------------
Annual net interest income change from
an immediate change in rates $ (187) $(48) $ 25 $ 748
Percent change (.4)% (.1)% .1% 1.6%
December 31, 2001
-100bp -25bp +25bp +100bp
Annual net interest income change from ----------------------------------
an immediate change in rates $ (337) $210 $(193) $ 632
Percent change (.7)% .5% (.4)% 1.4%
Historically, rate shock analysis has shown that the Company is liability
sensitive, meaning that interest sensitive liabilities exceed interest sensitive
assets and generally this results in the net interest margin increasing in a
falling rate environment and decreasing in a rising rate environment. However,
the rate shock analysis shows in the current very low interest rate environment,
if market rates continue to decrease, the rates paid on deposit liabilities may
not reflect the full amount of the decrease since rates are already so low. If
rates increase, rates paid on deposits may not reflect the full extent of the
rate increase until rates approach a more historical level.
23
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 non-earning assets during the construction phase. Upon
completion, for a time, expenses exceed the income of the branch. While new
branches retard short-term earnings, the Company believes its market warrants
judicious office additions.
The Bank recently closed on the purchase of property at 55th Street and
Plainfield Road in Countryside, Illinois. The Bank plans to open its 15th branch
on this site by the end of 2002. The Bank has a contract on property at Route 38
and Randall Road in St. Charles, Illinois where it plans to build a branch to
open in 2003, subject to final approvals.
Forward Looking Statements
This report contains certain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. The Company
intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, and this statement is included for purposes of
involving these safe harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe the Company's future plans, strategies
and expectations, can generally be identified by use of the words "believe,"
"expect," "intend," "anticipate," "estimate," "project," or similar expressions.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain and actual results may differ materially from
the results projected in forward-looking statements due to various factors.
These risks and uncertainties include, but are not limited to, fluctuations in
market rates of interest and loan and deposit pricing; a deterioration of
general economic conditions in the Company's market areas; legislative or
regulatory changes; adverse developments in our loan or investment portfolios;
the assessment of its provision and reserve for loan losses; developments
pertaining to the loss situation discussed herein; significant increases in
competition or changes in depositor preferences or loan demand, difficulties in
identifying attractive branch sites or other expansion opportunities, or
unanticipated delays in construction build-out; difficulties in attracting and
retaining qualified personnel; and possible dilutive effect of potential
acquisitions or expansion. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements. We undertake no obligation to update publicly any of these
statements in light of future events except as may be required in subsequent
periodic reports filed with the Securities and Exchange Commission.
24
PART II. OTHER INFORMATION
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
See "Interest Rate Sensitivity" in ITEM 2.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held May 7, 2002 at 1400 Sixteenth
Street, Oak Brook Bank Conference Center, Oak Brook, Illinois.
Matters presented to the shareholders for vote were the election of three Class
III directors, the consideration and approval of an Employee Stock Purchase
Plan, and the ratification of the selection of the independent auditors. The
number of Common shares eligible to vote at the annual meeting was 6,321,452.
The results of the votes on these matters are as follows:
ELECTION OF DIRECTORS
Shareholders elected the following as Class III directors for a term expiring at
the 2005 Annual Meeting of Shareholders. Votes cast were as follows:
Votes Votes
For Withheld Abstain
------------ -------- -------
Miriam Lutwak Fitzgerald 5,793,431 9,142 13,342
Percent of Eligible Vote 91.65% .14% .21%
Eugene P. Heytow 5,446,109 356,464 13,342
Percent of Eligible Vote 86.15% 5.64% .21%
Geoffrey R. Stone 5,793,531 9,042 13,342
Percent of Eligible Vote 91.65% .14% .21%
Additional directors, whose term of office continued after the meeting are as
follows:
Class I - Term Expiring in 2003
- -------------------------------
John W. Ballantine
Frank M. Paris
Robert M. Wrobel
Class II - Term Expiring in 2004
- --------------------------------
Stuart I. Greenbaum
Richard F. Levy (Mr. Levy resigned as a director on June 4, 2002)
Richard M. Rieser, Jr.
Michael Stein
25
CONSIDERATION AND APPROVAL OF THE FIRST OAK BROOK BANCSHARES, INC.
EMPLOYEE STOCK PURCHASE PLAN
- --------------------------------------------------------------------------------
Shareholders approved the Employee Stock Purchase Plan.
Votes cast were as follows:
For Against Abstain
Votes Received 5,642,183 154,752 18,970
Percent of Votes Cast 97.01% 2.66% .33%
RATIFICATION OF THE APPOINTMENT OF KPMG LLP AS INDEPENDENT AUDITORS
FOR THE COMPANY
- --------------------------------------------------------------------------------
Shareholders ratified the appointment of KPMG LLP as independent auditors for
2002. Votes cast were as follows:
For Against Abstain
Votes Received 5,785,058 9,160 15,610
Percent of Eligible Vote 91.51% .14% .25%
ITEM 5. OTHER INFORMATION
On July 16, 2002, the Board of Directors selected Charles J. Gries, 57, as a
director of the Company to fill the vacancy created by the resignation of
Richard F. Levy. Mr. Gries, head of the public accounting firm of Charles J.
Gries & Company LLP, Schaumburg, Illinois, continues to serve as an Advisory
Director of the Bank, a position he has held since 1980.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
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).
26
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) Amendment to Loan Agreement between First
Oak Brook Bancshares, Inc. and LaSalle
National Bank dated December 1, 1991 as
amended March 31, 2002 filed herewith.
Exhibit (99.1) Certificate pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 for
Eugene P. Heytow, Chief Executive Officer
Exhibit (99.2) Certificate pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 for
Rosemarie Bouman, Chief Financial Officer
(B) Report on Form 8-K
A report on Form 8-K was filed with the SEC on July 18, 2002 and
provided the Company's second quarter earnings release dated July
16, 2002.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST OAK BROOK BANCSHARES, INC.
--------------------------------
(Registrant)
Date: August 12, 2002 /s/ RICHARD M. RIESER, JR
--------------- --------------------------------
Richard M. Rieser, Jr.
President, Assistant
Secretary, and Director
Date: August 12, 2002 /s/ ROSEMARIE BOUMAN
--------------- --------------------------------
Rosemarie Bouman
Vice President, Chief
Financial Officer and
Chief Accounting Officer
28