Back to GetFilings.com
================================================================================
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: September 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)
--------------------
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 November 12, 2002, 6,326,180 shares of the Company's common stock, par
value $2.00 per share, were outstanding.
================================================================================
1
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARIES
INDEX
Page
----
Part I. Financial Information
- ------------------------------
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets
September 30, 2002 and December 31, 2001 3
Condensed consolidated statements of income
Three and nine months ended September 30, 2002 and 2001 5
Condensed consolidated statements of changes in shareholders' equity
Nine months ended September 30, 2002 and 2001 7
Condensed consolidated statements of cash flows
Nine months ended September 30, 2002 and 2001 8
Notes to condensed consolidated financial
statements - September 30, 2002 and 2001 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Item 4. Controls and Procedures 30
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 *
Item 5. Other Information *
Item 6. Exhibits and Report on Form 8-K 30
Signatures 32
- ----------
* Not applicable
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2002 2001
------------- ------------
(Dollars in thousands)
Assets
- ------
Cash and due from banks $ 57,494 $ 54,097
Federal funds sold and interest bearing
deposits with banks 49,003 56,001
Securities held-to-maturity, at
amortized cost (fair value, $10,246
and $10,509 at September 30, 2002
and December 31, 2001, respectively) 9,488 10,228
Securities available-for-sale, at fair value 476,867 317,161
Loans, net of unearned discount 944,841 916,645
Less allowance for loan losses (6,916) (6,982)
------------- ------------
Net loans 937,925 909,663
------------- ------------
Premises and equipment, net 25,397 23,466
Other assets 33,163 15,935
------------- ------------
Total Assets $ 1,589,337 $ 1,386,551
============= ============
3
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
September 30, December 31,
2002 2001
------------------- -----------------
(Dollars in thousands except share amounts)
Liabilities
- -----------
Noninterest-bearing demand deposits $ 246,544 $ 211,939
Interest-bearing deposits:
Savings deposits and NOW accounts 148,132 136,156
Money market accounts 148,553 166,339
Time deposits
Under $100,000 351,707 293,302
$100,000 and over 376,354 270,230
------------------- -----------------
Total interest-bearing deposits 1,024,746 866,027
------------------- -----------------
Total deposits 1,271,290 1,077,966
Securities sold under agreements to repurchase
and other short term debt 72,857 82,013
Treasury, tax and loan demand notes 19,453 20,000
Federal Home Loan Bank borrowings 87,000 86,000
Trust Preferred Capital Securities 18,000 6,000
Other liabilities 12,720 15,020
------------------- -----------------
Total Liabilities 1,481,320 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 September 30, 2002 and December 31, 2001,
issued--7,283,256 shares at September 30, 2002 and
December 31, 2001, outstanding--6,326,180
shares at September 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 8,619 3,437
Retained earnings 84,525 81,336
Less cost of shares in treasury, 957,076 common shares
at September 30, 2002 and 972,625 common shares at
December 31, 2001 (11,486) (11,666)
------------------- -----------------
Total Shareholders' Equity 108,017 99,552
------------------- -----------------
Total Liabilities and Shareholders' Equity $ 1,589,337 $ 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 Nine months
ended September 30, ended September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
(Dollars in thousands, except share amounts)
Interest income:
Interest and fees on loans $14,791 $16,567 $44,503 $49,269
Interest on securities:
U.S. Treasury and Government agencies 5,206 3,606 13,503 11,428
Obligations of states and political subdivisions 542 693 1,527 2,115
Other securities 495 385 1,250 967
Interest on Federal funds sold, securities
purchased under agreements to resell
and deposits with banks 268 352 858 1,387
Interest on deposits with banks - - 1 4
------ ------ ------ -------
Total interest income 21,302 21,603 61,642 65,170
------ ------ ------ -------
Interest expense:
Interest on savings deposits and NOW accounts 435 649 1,263 2,257
Interest on money market accounts 769 1,027 2,391 3,344
Interest on time deposits 5,881 7,528 17,014 23,813
Interest on Federal funds purchased, securities
sold under agreements to repurchase and other
short term debt 320 802 1,108 2,797
Interest on Treasury, tax and loan demand notes 33 95 170 484
Interest on Federal Home Loan Bank borrowings 1,383 1,321 4,025 3,886
Interest on Trust Preferred Capital Securities 326 161 657 481
------ ------ ------ -------
Total interest expense 9,147 11,583 26,628 37,062
------ ------ ------ -------
Net interest income 12,155 10,020 35,014 28,108
Provision for loan losses 2,200 500 13,550 1,050
------ ------ ------ -------
Net interest income after provision for loan losses $ 9,955 $ 9,520 $21,464 $27,058
------ ------ ------ -------
5
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)
(Unaudited)
Three months Nine months
ended September 30, ended September 30,
------------------ ------------------
2002 2001 2002 2001
---- ---- ---- ----
(Dollars in thousands except share amounts)
Other income:
Service charges on deposit accounts $1,898 $ 1,645 $ 5,491 $ 4,483
Investment management and trust fees 406 346 1,221 1,046
Merchant card processing fees 1,262 1,061 3,572 2,735
Fees on mortgages sold, net of commissions 207 203 483 413
Income from revenue sharing agreement - 225 450 675
Other operating income 429 295 1,143 1,008
Investment securities gains (losses), net (4) - 311 234
----- ------ ------ ------
Total other income 4,198 3,775 12,671 10,594
----- ------ ------ ------
Other expenses:
Salaries and employee benefits 3,961 4,687 14,298 13,681
Occupancy expense 578 498 1,643 1,518
Equipment expense 458 501 1,398 1,493
Data processing 442 382 1,247 1,104
Professional fees 704 165 1,471 551
Postage, stationery and supplies 278 246 817 699
Advertising and business development 406 425 1,259 1,207
Merchant card interchange expense 949 793 2,748 2,133
Other operating expenses 598 371 1,470 1,106
----- ------ ------ ------
Total other expenses 8,374 8,068 26,351 23,492
----- ------ ------ ------
Income before income taxes 5,779 5,227 7,784 14,160
Income tax expense 1,662 1,637 2,033 4,373
----- ------ ------ ------
Net income $4,117 $ 3,590 $ 5,751 $ 9,787
===== ====== ====== ======
Basic earnings per share $ .65 $ .57 $ .91 $ 1.54
===== ====== ====== ======
Diluted earnings per share $ .63 $ .56 $ .88 $ 1.52
===== ====== ====== ======
See Notes to Condensed Consolidated Financial Statements.
6
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Accumulated
Other Total
Common Comprehensive Retained Treasury Shareholders'
Stock Surplus Income Earnings Stock Equity
----- ------- ------ -------- ----- ------
(Dollars in thousands)
Nine Months Ended September 30, 2002
- ------------------------------------
Balance at January 1, 2002 $14,567 $11,878 $3,437 $81,336 $(11,666) $ 99,552
Comprehensive income:
Net Income 5,751 5,751
Unrealized holding gain during
the period, net of
reclassification adjustment 5,182 5,182
--------
Total comprehensive income 110,485
Dividends declared (2,562) (2,562)
Issuance of notes receivable on
exercised options (300) (300)
Exercise of stock options,
net of tax benefit 214 180 394
------- ------- ------ ------- -------- --------
Balance at September 30, 2002 $14,567 $11,792 $8,619 $84,525 $(11,486) $108,017
======= ======= ====== ======= ======== ========
Nine Months Ended September 30, 2001
- ------------------------------------
Balance at January 1, 2001 $14,567 11,849 $1,410 $70,593 $(10,813) $ 87,606
Comprehensive income:
Net Income 9,787 9,787
Unrealized holding gain during
the period, net of
reclassification adjustments 3,954 3,954
--------
Total comprehensive income 101,347
Dividends declared (2,150) (2,150)
Exercise of stock options,
net of tax benefit 29 182 211
Purchase of treasury stock (1,035) (1,035)
------- ------- ------ ------- -------- --------
Balance at September 30, 2001 $14,567 $11,878 $5,364 $78,230 $(11,666) $ 98,373
======= ======= ====== ======= ======== ========
See Notes to Condensed Consolidated Financial Statements.
7
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months
ended September 30,
-----------------------------
2002 2001
---- ----
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 5,751 $ 9,787
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, accretion and amortization 1,930 1,965
Provision for loan losses 13,550 1,050
Net gains on sales of investment securities (311) (234)
Proceeds from sale of Broadview property - 300
Gain on sale of Broadview property - (172)
Decrease from revenue sharing agreement (28) (351)
Stock dividends (233) (321)
Origination of real estate loans for sale (48,332) (45,830)
Gain on sale of mortgage loans originated for sale (735) (625)
Proceeds from sale of real estate loans originated for sale 48,195 45,836
(Increase) decrease in other assets (5,808) 528
(Decrease) increase in other liabilities (4,969) 2,242
---------- ---------
Net cash provided by operating activities 9,010 14,175
---------- ---------
Cash flows from investing activities:
Securities held-to-maturity:
Purchases (2,828) (1,800)
Proceeds from maturities, calls and paydowns 3,573 10,392
Securities available-for-sale
Purchases (374,517) (77,166)
Proceeds from maturities, calls and paydowns 120,601 73,731
Proceeds from sales 102,424 29,407
Increase in loans (40,940) (82,524)
Purchases of premises and equipment (3,677) (1,272)
Purchase of Bank Owned Life Insurance (11,400) -
---------- ---------
Net cash used in investing activities (206,764) (49,232)
---------- ---------
Cash flows from financing activities:
Increase (decrease) in noninterest-bearing demand deposits 34,605 (22,607)
Increase in interest-bearing deposit accounts 158,719 84,068
(Decrease) increase in short term borrowing obligations (9,703) 10,635
Proceeds from Federal Home Loan Bank borrowings 6,000 5,000
Repayment of Federal Home Loan Bank borrowings (5,000) -
Proceeds from Trust Preferred Capital Securities 12,000 -
Purchase of treasury stock - (1,035)
Issuance of notes receivable on options exercised (300) -
Exercise of stock options 394 211
Cash dividends (2,562) (2,150)
---------- ---------
Net cash provided by financing activities 194,153 74,122
---------- ---------
Net (decrease) increase in cash and cash equivalents (3,601) 39,065
Cash and cash equivalents at beginning of period 110,098 71,050
---------- ---------
Cash and cash equivalents at end of period $ 106,497 $ 110,115
========== =========
Supplemental disclosures:
Interest paid $ 28,945 $ 38,297
Income taxes paid 5,000 2,860
Transfer of securities to 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
SEPTEMBER 30, 2002 and 2001
(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 Resources"
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 nine month periods ended September 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. 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. In the case of a net loss, there is no dilutive effect of
stock options on EPS.
9
The following table sets forth the denominator used for basic and diluted
earnings per share for the periods ended September 30, 2002 and 2001:
Three Months Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
---------------------------- --------------------------
(Dollars in thousands)
Net income $ 4,117 $ 3,590 $ 5,751 $ 9,787
=========== =========== ========== ==========
Denominator for basic earnings
per share - weighted average
shares outstanding 6,338,828 6,328,201 6,334,528 6,336,828
Effect of diluted securities:
Stock options granted to
employees and directors 174,633 127,661 174,577 105,150
----------- ----------- ---------- ----------
Denominator for diluted
earnings per share 6,513,461 6,455,862 6,509,105 6,441,978
=========== =========== ========== ==========
Earnings per share:
Basic $ .65 $ .57 $ .91 $ 1.54
Diluted $ .63 $ .56 $ .88 $ 1.52
=========== =========== ========== ==========
Weighted average options outstanding that were not included in the
denominator for diluted earnings per share totaled 6,500 and 4,141 for the
three and nine month periods ending September 30, 2002, respectively, as
their effect would be antidilutive. There were no antidilutive shares for
the three and nine month periods ending September 30, 2001.
3. 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 September 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.
4. Restatement and Reclassification
Certain amounts in the September 30, 2001 interim condensed consolidated
financial statements have been reclassified to conform to their 2002
presentation.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Earnings Highlights - Third Quarter Results
The Company recorded net income for the third quarter of 2002 of $4,117,000
compared with net income of $3,590,000 earned in the third quarter of 2001.
Basic earnings per share for the third quarter of 2002 was $.65 as compared to
basic earnings per share of $.57 for 2001, while diluted earnings per share was
$.63 for 2002 compared with earnings per share of $.56 for 2001.
Key performance indicators for the third quarter of 2002 showed an annualized
return on average assets (ROA) of 1.06% compared to a ROA of 1.09% in 2001. The
annualized return on average shareholders' equity (ROE) for the third quarter of
2002 was 15.43% compared to a ROE of 14.91% for the third quarter of 2001.
Net interest income, on a tax-equivalent basis, increased $2,070,000 or 20% as
compared to the third quarter of 2001. This increase is primarily attributable
to a 19% increase in average earning assets complemented by a 3 basis point
increase in the net interest margin to 3.34% in the third quarter of 2002 from
3.31% 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 122 basis points to 5.81%
while the cost of deposits and other borrowed funds decreased 154 basis
points to 3.01% for the third quarter of 2002. The weighted average prime
rate for the third quarter of 2002 was 4.75% as compared to 6.57% for the
third quarter of 2001. 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 $235.8 million or 19%, as compared to
2001. Average loans for the third quarter of 2002 grew $48.1 million or 5%,
as compared to the third quarter of 2001. The increase is primarily
attributable to growth in commercial real estate mortgage loans ($28.9
million), indirect vehicle loans ($18 million), home equity loans ($10.9
million) and construction loans ($8 million), offset by decreases in
residential mortgage loans ($13.2 million).
The Company's average securities portfolio increased by $167.2 million
primarily due to growth in the U.S. Government Agency securities ($169.4
million) and corporate and other securities ($14.6 million), offset by
decreases in U.S. Treasury ($5.6 million) and municipal securities ($11.2
million). Liquidity increased in the form of Federal Funds sold as a result
of deposit growth.
.. Average interest-bearing liabilities increased $196.5 million or 19%, as
compared to the third quarter of 2001. Average interest-bearing deposits
increased $175.1 million primarily due to the promotion of the new Advance
Interest CD product launched late in the first quarter of 2002 ($122.6
million), and growth in savings, NOW and money market accounts ($42.8
million). The Advance Interest CD product pays interest in advance, rather
than in arrears. In addition, the new Bolingbrook office, opened in March
2002, averaged $21.4 million in deposits for the third quarter of 2002.
11
Trust Preferred Capital Securities increased $12 million due to the
Company's participation in a pooled trust preferred offering late in the
second quarter of 2002. See "Capital Resources" for additional information.
In addition, average short-term debt and FHLB borrowings increased.
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. The net interest spread is the difference between
the average rates on interest-earning assets and the average rates on
interest-bearing liabilities. The interest rate margin represents net interest
income divided by average earning assets. Since a significant portion of the
Company's funding is derived from interest-free sources, primarily demand
deposits and stockholders' equity, the effective rate paid for all funding
sources is lower than the rate paid on interest-bearing liabilities alone.
12
Average balances and effective interest yields and rates on a tax equivalent
basis for the third quarter of 2002 and 2001 were as follows (dollars in
thousands):
Three months ended Three months ended
September 30, 2002 September 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 $ 61,878 $ 268 1.72% $ 41,465 $ 352 3.37%
Securities /1/ 471,074 6,460 5.44 303,843 4,954 6.47
Loans:/1, 2/
Commercial 131,016 2,053 6.22 135,558 2,433 7.12
Real estate:
Construction, land acquisition
and development 100,185 1,318 5.22 92,210 1,649 7.09
Commercial mortgage 235,299 4,191 7.07 206,368 4,121 7.92
Residential mortgage 102,564 1,715 6.64 115,751 2,058 7.06
Home equity 117,828 1,382 4.65 106,962 1,786 6.62
Indirect vehicle 240,391 3,959 6.53 222,344 4,315 7.70
Consumer 11,347 194 6.77 11,300 238 8.34
---------- --------- ---- ---------- --------- -----
Total average loans $ 938,630 $ 14,812 6.26% $ 890,493 $ 16,600 7.40%
---------- --------- ----- ---------- --------- -----
Total average earning assets/
interest income $1,471,582 $ 21,540 5.81% $1,235,801 $ 21,906 7.03%
Cash and due from banks 40,624 44,880
Other assets 43,434 36,912
Allowance for loan losses (17,884) (6,313)
---------- ----------
Total average assets $1,537,756 $1,311,280
========== ==========
Interest-bearing deposits:
Savings deposits and
NOW accounts $ 144,394 $ 435 1.20% $ 124,525 $ 649 2.07%
Money market accounts 151,871 769 2.01 128,926 1,027 3.16
Time deposits 710,156 5,881 3.29 577,827 7,528 5.17
---------- --------- ---- --------- --------- -----
Total interest bearing deposits $1,006,421 $ 7,085 2.79% $ 831,278 $ 9,204 4.39%
Short-term debt 89,369 353 1.57 85,708 897 4.16
FHLB borrowings 91,674 1,383 5.98 86,000 1,321 6.09
Trust Preferred Capital Securities 18,000 326 7.18 6,000 161 10.62
----------- --------- ---- ---------- --------- -----
Total interest-bearing liabilities/
interest expense $1,205,464 $ 9,147 3.01% $1,008,986 $ 11,583 4.55%
Demand deposits 216,258 191,796
Other liabilities 10,211 14,940
---------- ----------
Total liabilities $1,431,933 $1,215,722
Shareholders' equity 105,823 95,558
---------- ----------
Total liabilities and
shareholders' equity $1,537,756 $1,311,280
========== ==========
Net interest income/spread /1/ $ 12,393 2.80% $ 10,323 2.48%
========= ==== ========= =====
Net interest margin /1/ 3.34% 3.31%
==== =====
____________________
/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
The Company recorded a provision for loan losses of $2.2 million for the third
quarter of 2002 as compared to $500,000 for the third quarter of 2001. The
increase is due primarily to a $1.7 million special provision specifically
related to apparent loan fraud on one construction loan. See "Asset Quality" for
additional information regarding this construction loan.
Total other income increased $423,000 or 11%. Service charges on deposit
accounts increased $253,000 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, paying in cash or a combination thereof. The Treasury
Management fees included in service charges on deposit accounts represent cash
fees paid by 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 that experienced
in the third quarter of 2002), cash fees tend 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, were flat as compared to the third
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 $60,000 primarily due to new
trust business. Discretionary assets under management reached $444 million at
September 30, 2002, up from $347 million at September 30, 2001. Total trust
assets climbed to $646.3 million at September 30, 2002 up from $529.5 million at
September 30, 2001.
Merchant card processing fees increased $201,000 primarily due to new merchant
accounts and higher sales volume. The number of merchant outlets at September
30, 2002 increased to 411 as compared to 361 at September 30, 2001. Merchant
interchange expense (in other operating expenses) rose $156,000 as compared to
the third quarter of 2001.
Fees on mortgages sold with servicing released increased slightly as compared to
the third quarter of 2001. The Company originated a total of $30.7 million in
mortgage loans in the third quarter of 2002, of which $22.8 million were sold.
During the same period of 2001, the Company originated $18.9 million in mortgage
loans, of which $18.6 million were sold. 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 Company's credit card portfolio in 1997 decreased $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 is no longer receiving income from this source.
Other operating income increased $134,000 due primarily to an increase of
$30,000 in mutual fund sweep fees and $73,000 related to a covered call option.
There were no outstanding call options at September 30, 2002.
The Company recorded net losses on the sales of investment securities of $4,000
in the third quarter of 2002. There were no sales of investment securities in
the third quarter of 2001.
Total other expenses increased $306,000 or 4%. Annualized operating expenses as
a percentage of average assets decreased to 2.2% for 2002 compared with 2.4% for
2001. Annualized net
14
overhead expenses as a percentage of average assets was 1.1% for 2002 compared
to 1.4% for 2001. The efficiency ratio (other expenses divided by net interest
income and other income) was 51.2% in 2002 as compared to 58.5% in 2001. The
lower ratios are due primarily to the adjustments made to performance related
compensation.
Salaries and employee benefits decreased $726,000 due to a $1.2 million
reduction in accruals for performance-related compensation. Performance related
compensation (bonus and profit sharing) were reduced to reflect the effect of
anticipated 2002 earnings falling short of performance related targets due to
significantly higher loan loss provisions and additional expenses related to the
apparent loan fraud (See "Asset Quality"). Excluding these accrual adjustments,
salaries and employee benefits would have increased $449,000 due to higher
compensation costs and an increase in the average number of full-time
equivalents to 345 from 320 for the same period of 2001.
Combined occupancy and equipment expense has increased $37,000 primarily due to
costs associated with the opening of the Bolingbrook branch in March 2002. This
increase is offset by lower depreciation expenses as many assets at the
corporate office have become fully depreciated.
Professional fees increased $539,000 primarily due to legal fees related to the
apparent loan fraud (See "Asset Quality"). In addition, the Company incurred
additional professional fees related to tax planning initiatives, employee
benefits, corporate matters and the Bank's subsidiary, Oak Real Estate
Development.
Other operating expenses increased $227,000 primarily due to receiver fees and
miscellaneous expenses related to the apparent loan fraud (See "Asset Quality").
In the fourth quarter of 2002, other expenses are expected to increase due to
higher insurance costs as a result of growth and a hardening insurance market.
In 2003, additional expenses are expected in connection with continued branch
growth, a new contract with the main software provider and the loss of a tenant
leasing space in the corporate office.
Earnings Highlights - Nine Month Results
Net income for the nine months ended September 30, 2002 was $5,751,000, compared
with $9,787,000 earned in 2001. Basic earnings per share for the first nine
months of 2002 were $.91 as compared to $1.54 earned in 2001, while diluted
earnings per share were $.88 in 2002 as compared to $1.52 in 2001.
Key performance indicators for the nine-month period showed an annualized return
of average assets (ROA) of .53% for 2002 compared with 1.02% for 2001. The
annualized return on average shareholders' equity (ROE) for 2002 was 7.45%
compared with 14.12% for 2001.
The decline in reported earnings is due to the apparent loan fraud discovered in
May 2002. Excluding the effects of the apparent loan fraud (special provisions
and expenses, net of performance based compensation reduction), net income for
the nine months ended September 30, 2002 would have been $13,406,000. Diluted
earnings per share would have been $2.10, up 38% over 2001. Annualized return on
average assets (ROA) would have been 1.23% and annualized return on average
shareholders' equity (ROE) would have been 17.37%.
15
Net interest income for the first nine months of 2002, on a tax equivalent
basis, increased $6,647,000 or 23%. This increase is due to a 14% increase in
average earning assets and a 24 basis point increase in the net interest margin
to 3.45% in 2002 from 3.21% 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 127 basis points to 6.03%
while the cost of deposits and other borrowed funds decreased 188 basis
points to 3.15% for the first nine months of 2002. The Federal Reserve
reduced interest rates eleven times in 2001 for a total of 475 basis
points. This resulted in an average prime rate of 4.75% for the nine months
ended September 30, 2002 as compared to 7.52% for the same period of 2001.
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 $171.5 million or 14% as compared to
2001. Average loans for the first nine months of 2002 grew $67.9 million or
8%, in comparison to the first nine months of 2001. The increase is
primarily attributable to growth in construction loans ($32.7 million),
commercial real estate ($32.3 million), indirect vehicle loans ($14
million) and home equity loans ($10 million), offset by a decrease in
residential loans ($17.9 million).
The Company's average securities portfolio increased $78.3 million
primarily due to the growth in U.S. Government Agency securities ($86.5
million) and corporate and other securities ($9.9 million), offset by
decreases in U.S. Treasury ($8 million) and municipal ($10.1 million)
securities. Federal funds sold increased as a result of the deposit growth.
.. Average interest-bearing liabilities increased $144 million or 15% as
compared to the first nine months of 2001. Average interest-bearing
deposits increased $128.8 million due to the promotion of the new Advance
Interest CD product ($53.9 million) and growth in savings, NOW and money
market accounts ($48.8 million). The Bolingbrook office, opened in March
2002, averaged $10.8 million in deposits for the first nine months in 2002.
Trust Preferred Capital Securities increased due to the Company's
participation in $12 million of a pooled trust preferred offering late in
the second quarter of 2002. See "Capital Resources" for addition
information. 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 nine 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 $ 66,760 $ 859 1.72% $ 41,484 $ 1,391 4.48%
Securities /1/ 389,237 16,893 5.80 310,910 15,335 6.59
Loans: /1, 2/
Commercial 137,748 6,280 6.10 140,449 8,102 7.71
Real estate:
Construction, land
acquisition and
development 101,563 4,333 5.70 68,859 3,993 7.75
Commercial mortgage 223,227 12,020 7.20 190,921 11,776 8.25
Residential mortgage 104,007 5,313 6.83 121,883 6,564 7.20
Home equity 114,452 4,078 4.76 104,463 5,710 7.31
Indirect vehicle 233,863 11,956 6.83 219,843 12,494 7.60
Consumer 10,893 586 7.20 11,454 740 8.63
---------- ------- ---- ---------- ------- -----
Total average loans $ 925,753 $44,566 6.44% $ 857,872 $49,379 7.70%
---------- ------- ---- ---------- ------- -----
Total average earning
assets/interest income $1,381,750 $62,318 6.03% $1,210,266 $66,105 7.30%
Cash and due from banks 43,094 42,064
Other assets 40,355 36,943
Allowance for loan losses (11,068) (6,031)
---------- ----------
Total average assets $1,454,131 $1,283,242
========== ==========
Interest-bearing deposits:
Savings deposits and
NOW accounts $ 140,981 $ 1,263 1.20% $ 125,837 $ 2,257 2.40%
Money market accounts 153,729 2,391 2.08 120,096 3,344 3.72
Time deposits 637,484 17,014 3.57 557,419 23,813 5.71
---------- ------- ---- ---------- ------- -----
Total interest bearing deposits $ 932,194 $20,668 2.96% $ 803,352 29,414 4.90%
Short-term debt 96,762 1,278 1.77 89,801 3,281 4.89
FHLB borrowings 89,209 4,025 6.03 85,322 3,886 6.09
Trust Preferred Capital Securities 10,264 657 8.57 6,000 481 10.73
---------- ------- ---- ---------- ------- -----
Total interest-bearing liabilities/
interest expense $1,128,429 $26,628 3.15% $ 984,475 $37,062 5.03%
Demand deposits 210,791 191,847
Other liabilities 11,752 14,233
---------- ----------
Total liabilities $1,350,972 $1,190,555
Shareholders' equity 103,159 92,687
---------- ----------
Total liabilities and shareholders'
equity $1,454,131 $1,283,242
========== ==========
Net interest income /spread /1/ $35,690 2.88% $29,043 2.27%
====== ==== ======= ====
Net interest margin /1/ 3.45% 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.
17
The Company recorded a provision for loan losses of $13.55 million for the first
nine months of 2002 compared to $1.05 million for the first nine months of 2001.
This increase was primarily due to $12.05 million in special provisions
specifically related to the apparent loan fraud on one construction loan
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, commercial mortgage and indirect vehicle loan
portfolios.
Total other income increased $2,077,000 or 20%. 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 21%. Service charges on
deposit accounts increased $1,008,000 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, paying in cash or a combination of both.
The Treasury Management fees included in service charges on deposit accounts
represent cash fees paid by 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 that experienced during the first nine months of 2002), cash fees tend 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 2% for the first nine 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 $175,000 due primarily to new
customers and an increase in discretionary assets under management.
Merchant card processing fees increased $837,000 primarily due to new merchant
accounts and higher sales volume. Merchant interchange expense (in other
operating expenses) rose $615,000 as compared to the same period of 2001.
Fees on mortgages sold with servicing released increased $70,000 as compared to
the first nine months of 2001. As a result of lower interest rates, the
residential mortgage loan refinance market improved beginning in late 2001 and
continuing during 2002. The Company originated a total of $80.7 million in
mortgage loans through September 30, 2002, of which $48.2 million were sold.
During the same period of 2001, the Company originated $52.8 million in mortgage
loans, of which $45.8 million were sold. 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 decreased $225,000. Under the agreement, the
Company shared in the revenue from the sold portfolio for five years ending June
30, 2002. Since the contractual term has expired, the Company will no longer be
receiving income from this source.
Excluding the gain on the sale of the Broadview drive-thru of $172,000 in 2001,
other operating income increased $307,000 primarily due to an increase of
$126,000 in mutual fund sweep fees attributable to increased volume and income
related to covered call option transactions totaling $112,000.
18
The Company recorded net investment securities gains of $311,000 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 $2.5 million in corporate and other securities. The gains in 2001 were from
the sales of $29 million in U.S. Government Agency securities and $500,000 of
trust preferred convertible capital securities.
Total other expenses increased $2,859,000 or 12%. Annualized operating expenses
as a percentage of average assets remained constant at 2.4% for 2002 and 2001.
Annualized net overhead expenses as a percentage of average assets improved to
1.3% for 2002 compared to 1.4% for 2001. The efficiency ratio (other expenses
divided by net interest income and other income) improved to 55.3% in 2002 as
compared to 60.7% in 2001.
Salaries and employee benefits increased $617,000 primarily due to increased
compensation costs and an increase in the number of full-time equivalents. The
increase is partially offset by reductions in performance-related compensation
resulting from anticipated 2002 earnings falling short of performance-related
targets due to significantly higher loan loss provisions and additional expenses
related to the apparent loan fraud (See "Asset Quality").
Professional fees increased $920,000 primarily due to legal and accounting fees
totaling $593,000 related to the apparent loan fraud (See "Asset Quality"). In
addition, the Company incurred additional professional fees related to tax
planning initiatives, employee benefits, corporate matters and the Bank's
subsidiary, Oak Real Estate Development.
Data processing fees increased $143,000 due to various increased services
provided by the main software provider and miscellaneous expenses.
Other operating expenses increased $364,000 primarily due to receiver fees and
miscellaneous expenses of $283,000 related to the apparent loan fraud (See
"Asset Quality").
ASSET QUALITY
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, known and inherent risks in the portfolio, composition of the
loan portfolio, current economic conditions, historical losses experienced by
the industry, value of the underlying collateral 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.
19
Summary of Loan Loss Experience
Three months Nine months
ended September 30 ended September 30
------------------ ------------------
2002 2001 2002 2001
---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of period $ 18,201 $ 6,159 $ 6,982 $ 5,682
-------- -------- -------- --------
Charge-offs during the period:
Real estate: /(1)/
Construction, land acquisition and
development loans $(13,392) $ - $(13,392) $ -
Commercial loans - - - (4)
Indirect vehicle loans (170) (81) (379) (184)
Consumer loans (5) (8) (13) (9)
-------- -------- -------- --------
Total charge-offs (13,567) (89) (13,784) (197)
Recoveries during the period:
Real estate:/(1)/
Commercial loans 15 - 39 -
Indirect vehicle loans 60 13 114 28
Consumer loans 7 7 15 27
-------- -------- -------- --------
Total recoveries 82 20 168 55
Net charge-offs during the period (13,485) (69) (13,616) (142)
Provision for loan losses 2,200 500 13,550 1,050
-------- -------- -------- --------
Allowance for loan losses, end of the period $ 6,916 $ 6,590 $ 6,916 $ 6,590
======== ======== ======== ========
Allowance for loan losses as a
percent of loans outstanding .73% .73% .73% .73%
Ratio of allowance for loan losses to
nonperforming loans 1.23x 4.23x 1.23x 4.23x
/1/ There were no losses or recoveries in the commercial mortgage, residential
mortgage or home equity loan portfolios during the periods presented.
20
Nonperforming Assets
The following table summarizes the Company's nonperforming assets (nonaccrual
loans, renegotiated loans, loans past due 90 days or more and still accruing,
other real estate owned and repossessed vehicles):
September 30, December 31,
2002 2001
---------------------------------------
(Dollars in thousands)
Nonaccrual $5,128 $1,295
Loans which are past due 90 days or
more and still accruing 496 437
------ ------
Total nonperforming loans 5,624 1,732
Other real estate owned - -
Repossessed vehicles 436 146
------ ------
Total nonperforming assets $6,060 $1,878
====== ======
Nonperforming loans to loans outstanding .60% .19%
Nonperforming assets to total assets .38% .14%
Allowance for loan losses to nonperforming loans 1.23x 4.03x
Allowance for loan losses to loans outstanding .73% .76%
Net chargeoffs to average loans
outstanding (annualized) 1.97% .03%
In May 2002, the Bank discovered an apparent fraud related to a loan to 60 W.
Erie, LLC -- a construction loan to build a luxury high rise condominium in
Chicago. The Bank initiated foreclosure proceedings and filed a fraud suit
against the developers and certain of its principals and affiliates, two of whom
have been criminally indicted for conduct relating to the loan. The Bank is
pursuing a claim against its bonding company and is evaluating claims against
other potentially responsible parties. No assurances can be given about the
amount or timing of any recoveries.
The Bank is in final negotiations with the developers, the general contractor
and subcontractors, and a qualified real estate development company, which, if
successful, will result in transfer of title to the project to a special purpose
subsidiary of the Bank, settle outstanding mechanic's lien claims, and permit
the Bank to fund and complete the project and offer the completed units for
sale. An escrow has been opened and all parties are in the process of submitting
their agreed upon deposits. There are no remaining issues of dispute, and the
escrow closing and transfer of title to the Bank could take place within a
matter of days. The Bank would then expect to fund approximately $19.1 million
in additional completion costs, the repayment of which will be dependent on the
state of the for-sale condominium market in Chicago.
Based on its assessment as of September 30, 2002 of the net realizable value
from the project, the Bank wrote the 60 W. Erie loan down by $12.885 million -
from $17.062 million to $4.177 million. The loan remains on nonaccrual status.
The Bank has also incurred professional fees of $593,000 and receiver and
miscellaneous expenses of $283,000 related to 60 W. Erie. All of these costs
have been expensed as incurred.
21
Included in the professional fees are fees paid to a team of specialists from
KPMG LLP to review all of the Bank's commercial construction loans and fees paid
to 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.
The Company has another nonaccrual construction loan that is a participation on
an unfinished hotel construction project in Burr Ridge, Illinois. As of
September 30, 2002, the loan has been charged down by $507,000 leaving a
remaining balance of $820,000. The borrower previously filed for bankruptcy.
Under the protection of the bankruptcy court, the property was sold in September
2002 for $5.5 million and the proceeds were deposited with the court. The
claimants to these proceeds are the two lenders and the mechanics lien
claimants. The proceeds will be distributed once the mechanic's lien claims are
settled. It is too early to determine the timing or extent of any recovery.
After the third quarter charge-offs, the Company's allowance for loan losses
stood at $6.9 million at September 30, 2002, or .73% of loans outstanding,
compared to $6.6 million, or .73% of loans outstanding at September 30, 2001.
The current allowance represents 1.23x 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 nine months of 2002 totaled $13,616,000 compared
to $142,000 in 2001. Virtually all charge-offs relate to the Company's $12.885
million charge-off of 60 W. Erie and the $507,000 charge-off on the Burr Ridge
hotel. The remaining charge-offs relate primarily to the Company's indirect
vehicle portfolio. Annualized net charge-offs as a percentage of the average
indirect portfolio has increased to .15% for the nine months ended September 30,
2002 as compared to .09% for the same period of 2001.
Losses on repossessed vehicles are charged off to the allowance when title is
taken and the vehicle is valued. Once the Bank obtains title, repossessed
vehicles are not included in loans but rather are classified as other assets on
the balance sheet and typically are sold within 120 days. Due to the downturn in
the economy, the Bank's portfolio of repossessed assets has increased from
$146,000 at December 31, 2001 to $436,000 at September 30, 2002. In addition to
an increased balance, the holding period has been extended due to the slower
used auto market.
FINANCIAL CONDITION
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 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:
22
The Bank:
. Federal funds lines aggregating $100 million with seven correspondent
banks, subject to continued good financial standing. As of September
30, 2002, all $100 million was available for use under these lines.
. Reverse repurchase agreement lines aggregating $375 million with five
brokerage firms based on the pledge of specific collateral and
continued good financial standing of the Bank. As of September 30,
2002, the Bank has $350 million remaining on these lines, subject to
the availability of collateral.
. Advances from the Federal Home Loan Bank of Chicago based on the
pledge of specific collateral and FHLB stock ownership. As of
September 30, 2002, advances totaled $87 million and approximately $8
million remained available to the Bank under the FHLB agreements.
Additional advances can be obtained subject to the availability of
collateral.
. The Bank has a borrowing line of approximately $187 million at the
discount window of the Federal Reserve Bank, subject to the
availability of collateral. The line was unused at September 30, 2002.
As of September 30, 2002, the Bank has unpledged collateral totaling
approximately $50 million available to pledge on the reverse repurchase or
Federal Home Loan Bank lines.
The Parent Company:
. The Company has a revolving credit arrangement for $15 million. The
line was unused at September 30, 2002. The maturity date of the line
is April 1, 2003 and is anticipated to continue to be renewed
annually.
. The Company also has cash, short-term investments and other marketable
securities totaling $6.2 million at September 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 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
23
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
repositioning 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 September 30, 2002 and December 31, 2001. These
projections should not be relied upon as indicative of actual results that would
be experienced if such interest rate changes occurred. (Dollars in thousands.)
September 30, 2002
-100bp -25bp +25bp +100bp
-------------------------------------------------
Annual net interest income change from
an immediate change in rates $ 241 $ 63 $ (85) $ 361
Percent change .5% .1% (.2)% (.8)%
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%
The Company is liability sensitive, meaning that interest sensitive
liabilities exceed interest sensitive assets, which generally results in the net
interest margin increasing in a falling rate environment and decreasing in a
rising rate environment. 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.
24
Commercial Commitments
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.
The summary of these commitments to extend credit follows:
September 30, December 31,
2002 2001
--------------------------------------
(Dollars in thousands)
Commercial loans $ 85,017 $119,476
Real estate:
Construction, land acquisition
and development loans 82,582 74,150
Home equity loans 122,885 126,514
Mortgage 246 126
Consumer 101 230
Check credit 837 878
Performance standby letters of credit 8,584 13,122
Financial standby letters of credit 7,777 6,897
-------- --------
Total commitments $308,029 $341,393
======== ========
Investments
The following table indicates investments by type (at carrying value):
September 30, December 31,
2002 2001
-------------------------------------------
(Dollars in thousands)
U.S. Treasury $ 15,938 $ 16,561
U.S. Government agencies 383,171 242,542
State and municipal obligations 43,156 46,789
Corporate and other securities 44,090 21,497
-------- --------
Total investment portfolio $486,355 $327,389
======== ========
25
The Company's holdings of U.S. Treasuries decreased slightly and the average
maturity of this portfolio decreased to less than one year at September 30, 2002
from 1.4 years at December 31, 2001. None of the U.S. Treasuries have call
features as of September 30, 2002.
The U.S. Government Agency securities (including agency mortgage backed
securities and agency collateralized mortgage obligations) portfolio increased
$140.6 million primarily due to additional purchases of $349.7 million offset by
maturities, calls and sales. The average maturity of this portfolio increased to
6.7 years at September 30, 2002 from 4.4 years at December 31, 2001. Included in
this portfolio are $148.1 million in securities with coupon rates ranging from
2.31% to 6.55% with the potential for being called in 2003.
The Company's municipal security holdings decreased $3.6 million primarily due
to scheduled maturities and calls on securities. The average contractual
maturity of this portfolio decreased to 4.3 years at September 30, 2002 from 4.6
years at December 31, 2001. Included in this portfolio are $4 million in
securities with coupon rates ranging from zero coupon to 6.2% with the potential
for being called in 2003.
Holdings of corporate and other securities increased $22.6 million primarily due
to purchases of $15 million in mutual funds backed primarily by U.S. Government
Agencies and purchases of higher yielding long-term Trust Preferred Securities.
The mutual funds were purchased with excess liquidity in lieu of Federal Funds
and can be liquidated with a one day notice. Due to the addition of the mutual
funds, the average contractual maturity of this portfolio decreased to 14.1
years at September 30, 2002 from 19.3 years at December 31, 2001. Included in
this portfolio are $956,000 in securities with a coupon rate of 8.75% with the
potential for being called in 2003.
At September 30, 2002, there were 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.
Loans
The following table indicates loans outstanding, as of the dates indicated:
September 30, December 31,
2002 2001
---------------------------
(Dollars in thousands)
Commercial loans $145,615 $146,691
Real estate loans:
Construction, land acquisition
and development 84,968 102,594
Commercial mortgage 237,644 213,689
Residential mortgage 101,796 105,168
Home equity 120,668 112,877
Indirect vehicle loans 242,323 224,311
Consumer loans 11,843 11,353
-------- --------
Total loans 944,857 916,683
Less unearned discount (16) (38)
-------- --------
Loans, net of unearned discount $944,841 $916,645
======== ========
26
The commercial loan portfolio is substantially secured by business assets. At
September 30, 2002 and December 31, 2001, the commercial loan portfolio included
nationally syndicated loans with a balance of $43.7 million and $51.8 million,
respectively.
The construction, land acquisition and development loans represent loans for the
following purposes: approximately 58% are for construction of 1-4 family
detached homes, condominiums and townhouses in the Chicago metropolitan area;
approximately 25% are for retail developments; 9% represent rental multi-family
residential projects; 6% are for industrial buildings and the remaining 2% are
for hotel and office properties. The decrease in this portfolio is primarily due
to the charge-offs described in "Asset Quality".
The Company's commercial mortgage portfolio is comprised of approximately 44%
multi-family residential properties; 29% retail properties; 9% owner-occupied
commercial and industrial buildings; and 18% non-owner occupied commercial and
industrial buildings. The growth in this portfolio is primarily due to
successful marketing.
The Company's indirect vehicle portfolio is primarily generated from Chicago
Metropolitan area auto and Harley-Davidson motorcycle dealers. In addition,
Harley Davidson loans were generated in nine states as part of a national
marketing initiative. Harley Davidson loans totaled $27.9 million and $18.7
million at September 30, 2002 and December 31, 2001, respectively.
The Company does not have any programs to buy or originate subprime credits.
There were no loan concentrations exceeding 10% of total loans at September 30,
2002 or December 31, 2001.
Capital Resources
Shareholders' equity totaled $108 million at September 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 September 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 September 30, 2002:
Total Capital (to Risk Weighted Assets)
Consolidated $124,212 11.20% $88,711 8% $110,889 10%
Oak Brook Bank 118,557 10.73 88,372 8 110,465 10
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 117,296 10.58 44,355 4 66,533 6
Oak Brook Bank 111,641 10.11 44,186 4 66,279 6
Tier 1 Capital (to Average Assets)
Consolidated 117,296 7.57 61,975 4 77,469 5
Oak Brook Bank 111,641 7.22 61,818 4 77,272 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 3-Month LIBOR
27
plus 3.45%, currently 5.24%, 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 September 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
are shown 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 nine months of 2002 and approximately 104,000
shares remain available to be repurchased under the program.
The market price of the Company's common stock at September 30, 2002 was $29.73
with a book value of $16.60 per share. The ratio of the Company's price to the
last 12 months earnings was 20.09x.
During the first nine months of 2002, the Company paid dividends of $.3825 per
share. The dividend payout ratio on nine month earnings was 44.55% for 2002
compared to 21.98% for 2001. On October 15, 2002 the Company declared a cash
dividend of $.1425 payable on January 17, 2003, to shareholders of record as of
January 6, 2003.
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, the Company believes its market warrants
judicious office additions.
The Bank purchased property and began construction of a branch at 55th Street
and Plainfield Road in Countryside, Illinois. The Bank plans to open its 15th
branch on this site in January 2003. The Bank has purchased property at Route 38
and Randall Road in St. Charles, Illinois where it plans to build a branch to
open later in 2003.
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
28
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 invoking 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 60 W. Erie
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.
29
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
See "Interest Rate Sensitivity" in ITEM 2.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, an evaluation was carried
out, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Securities Exchange Act Rule
13a-15. Based upon, and as of the date of that evaluation, the Chief Executive
Officer an Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective, in all material respects, in timely
alerting them to material information relating to the Company (and its
consolidated subsidiaries) required to be included in the periodic reports the
Company is required to file and submit to the SEC under the Exchange Act.
There have been no significant changes to the Company's internal controls or, to
management's knowledge, in other factors that could significantly affect these
controls subsequent to the date that the internal controls were most recently
evaluated. There were no significant deficiencies or material weaknesses
identified in that evaluation and, therefore, no corrective actions were taken.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit (3.1) Restated Certificate of Incorporation of th 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).
30
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 (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 October 16, 2002 and
provided the Company's second quarter earnings release dated October 15,
2002.
31
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: November 14, 2002 /s/ RICHARD M. RIESER, JR
----------------- ----------------------------------------
Richard M. Rieser, Jr.
President, Assistant
Secretary, and Director
Date: November 14, 2002 /s/ ROSEMARIE BOUMAN
----------------- ----------------------------------------
Rosemarie Bouman
Vice President, Chief
Financial Officer and
Chief Accounting Officer
32
CERTIFICATION
I, Eugene P. Heytow, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Oak Brook
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d - 14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ EUGENE P. HEYTOW
----------------------------
Eugene P. Heytow
Chief Executive Officer
November 14, 2002
33
CERTIFICATION
I, Rosemarie Bouman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Oak Brook
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d - 14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ ROSEMARIE BOUMAN
---------------------------
Rosemarie Bouman
Chief Financial Officer
November 14, 2002
34