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UNITED STATES SECURITIES

FORM 10-K

For the fiscal year ended December 31, 2003

Commission file number 0-14468

FIRST OAK BROOK BANCSHARES, INC.

1400 Sixteenth Street, Oak Brook, IL 60523 - Telephone Number (630) 571-1050

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  X  No        

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes  X 

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  X  No        .

      The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant at June 30, 2003 was approximately: $139,067,377 based upon the last sales price of the registrant’s common stock of $21.99 per share as reported by the National Association of Securities Dealers Automated Quotation System on June 30, 2003. As of March 8, 2004, 9,690,381 shares of common stock were outstanding.

      Documents incorporated by reference: Portions of the Company’s Proxy Statement for its 2004 Annual Meeting of Shareholders to be filed on or about April 1, 2004 are incorporated by reference in Part III.

Form 10-K Table of Contents

      Certain information required to be included in Form 10-K is included in the Proxy Statement used in connection with the 2004 Annual Meeting of Shareholders to be held on May 4, 2004.

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PART I

General

      First Oak Brook Bancshares, Inc. (the “Company”) was organized under Delaware law in 1983 as a bank holding company under the Bank Holding Company Act of 1956, as amended. The Company owns all of the outstanding capital stock of Oak Brook Bank (the “Bank”), Oak Brook, Illinois, which is an Illinois state-chartered bank. The Company is headquartered and its largest banking office is located in Oak Brook, Illinois, twenty miles west of downtown Chicago. The Company employs 331 full-time and 31 part-time employees which represent 349 full-time equivalent employees at December 31, 2003.

      The Company has authorized 16,000,000 shares of Common Stock with a par value of $2.00. As of December 31, 2003, the Company had total assets of $1.848 billion, loans of $915.7 million, deposits of $1.459 billion, and shareholders’ equity of $120.9 million.

      The business of the Company consists primarily of the ownership, supervision and control of the Bank. The Company provides the Bank with advice, counsel and specialized services in various fields of banking policy and strategic planning. In addition to the Bank, the Company operates three wholly-owned subsidiaries: FOBB Statutory Trust I, FOBB Statutory Trust II and FOBB Statutory Trust III, created in 2000, 2002 and 2003, respectively, for the purpose of raising capital through participation in pooled trust preferred offerings. In accordance with new accounting guidelines, the Statutory Trust subsidiaries were deconsolidated in the first quarter of 2004. This deconsolidation did not have a material effect on the consolidated financial statements of the Company. See “Impact of Pending Accounting Standards” in Item 7 of this Form 10-K.

      The Bank operates three wholly-owned subsidiaries, Oak Real Estate Development Corporation, West Erie, LLC, and OBB Real Estate Holdings, LLC. Oak Real Estate Development Corporation was formed in 2000 to acquire, develop and rehabilitate single family and multifamily properties in Illinois. West Erie, LLC was formed in 2002 solely to develop and market a luxury condominium project acquired by the Bank by agreement in lieu of foreclosure.

      In October 2003, the Bank formed OBB Real Estate Holdings, LLC, a wholly-owned subsidiary. This subsidiary owns substantially all the shares of OBB Real Estate Investments, LLC. These subsidiaries were established as part of an initiative to enhance earnings by reducing expenses and to provide alternative methods of raising capital in the future.

      The Company, through the Bank, operates in a single segment engaging in general retail and commercial banking business, primarily in the Chicago Metropolitan area. The services offered include demand, savings and time deposits, corporate treasury management services, merchant credit card processing, commercial lending products such as commercial loans, construction loans, mortgages and letters of credit, and personal lending products such as residential mortgages, home equity lines and vehicle loans. The Bank operates a full-service investment management and trust department, and in 2003, formed an investment sales division. The investment sales division executes customer investment transactions in U.S. Treasury, U.S. Government agency, corporate and municipal securities primarily for commercial businesses, not-for-profit organizations, governmental entities and high net worth families.

      The Bank offers its services through multiple delivery channels. The Bank has seventeen brick and mortar offices; ten in DuPage County, five in Cook County, one in Will County, and one in Kane County, Illinois. Fifteen of these offices are in the western suburbs of Chicago, one is in a northern suburb of Chicago and one is in the River North neighborhood of Chicago, just north of the Loop and west of Michigan Avenue. The Bank offers a call center at 800-536-3000. Our Internet Branch at www.obb.com offers on-line banking and bill payment services in addition to accepting applications for consumer loans and retail accounts. The Bank has deployed 21 owned ATM’s, 17 located at bank offices and 4 located off premises, which its customers can use for free; and it allows its customers access to networked ATM’s (STAR & CIRRUS) for a fee.

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      The extension of credit inherently involves certain levels and types of risk (credit and default risk, interest rate and maturity mismatch risk, liquidity risk, industry and concentration risk and general economic conditions), which the Company manages through the establishment of lending, credit and asset/liability management policies and procedures. Credit risk is controlled and monitored through the use of lending standards, an individual review of potential borrowers and active asset quality management and administration. Active asset quality management and administration, including early problem loan identification and timely resolution of problems, further promotes appropriate management of credit risk and minimization of loan losses.

      Loans originated must comply with governmental rules, regulations and laws. While the Bank’s loan policies vary for different loan products, the policies generally cover such items as: percentages to be advanced and the type of lien taken to secure collateral, payment and maturity terms, down payment and/or loan-to-value requirements, debt-to-income and/or debt service coverage ratios, credit history, insurance requirements and other matters of credit concern. The Bank’s loan policies grant limited loan approval authority to designated loan officers. Where a credit request exceeds the loan officer’s approval authority, approval by a senior lending officer and/or bank loan committee and/or board of directors is required.

Competition

      The Company’s offices are part of the Chicago banking market, as defined by the Federal Reserve Bank of Chicago, which at June 30, 2003 (the most recent date for which statistics are available), had deposits in 305 financial institutions (commercial banks and thrift institutions) totaling $211.4 billion. Based on total deposits, the Bank was the 23rd largest financial institution serving the Chicago banking market. At June 30, 2003, the Bank had an approximate 4.9% market share of the total deposits in 75 DuPage County financial institutions, an approximate .2% market share of total deposits in 202 Cook County financial institutions and an approximate .4% market share of total deposits in 49 Will County financial institutions. The Company also began operating in Kane County in October of 2003. At June 30, 2003, Kane County consisted of 45 financial institutions with $6.5 billion of deposits. At December 31, 2003, the Company had $23.3 million in Kane County deposits.

      The Bank is located in a highly competitive market, facing competition for banking and related financial services from many financial intermediaries, including banks, savings and loan associations, finance companies, credit unions, mortgage companies, merchants, stockbrokers, insurance companies, mutual funds and investment companies. Competition is generally expressed in terms of interest rates charged on loans and paid on deposits; the price of products and services; the variety of financial services offered; convenience of service delivery in terms of extended hours, access to services through branches and offices, ATMs, the internet and call centers; and the qualifications, experience and skills of bank personnel. Additional competitive pressure also comes from several out-of-state banks’ (for example, Fifth Third Bank, Washington Mutual Savings Bank, and Bank of America) recent aggressive branch expansion into the Chicago banking market. In doing so, these banks are competing with the Company not only for retail and commercial customers, but also for competent bank personnel.

Available Information

      Our Internet address is www.firstoakbrook.com. We make available at this address, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition, our site also includes Investor Information, Stock Information, Corporate Governance Policies, Code of Ethics, Audit Committee Charter and Independent Directors Committee Charter including sub-charter relating to Compensation Matters and Nominating and Corporate Governance Matters.

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Regulation and Supervision

General

      Banking is a highly regulated industry. The following is a summary of several applicable statutes and regulations. However, these summaries are not complete, and reference should be made to the statutes and regulations for more information. Also, these statutes and regulations may change in the future, and it cannot be predicted what effect such changes, if made, will have on the Company. The supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of depositors, rather than stockholders of banks and bank holding companies.

Bank Holding Company Regulation

      The Company is registered as a “bank holding company” with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) pursuant to the Bank Holding Company Act of 1956, as amended (the Bank Holding Company Act of 1956 and the regulations issued thereunder are collectively referred to as the “BHC Act”), and the Company is subject to regulation, supervision and examination by the Federal Reserve, Federal securities laws and Delaware law.

      Minimum Capital Requirements. The Federal Reserve has adopted risk-based capital requirements for assessing bank holding company capital adequacy. These standards define capital and establish minimum capital ratios in relation to assets, both on an aggregate basis, and as adjusted for credit risks and off-balance sheet exposures. Under the Federal Reserve’s risk-based guidelines applicable to the Company, capital is classified into two categories.

	Tier 1, or “core,” capital consists of the sum of: common shareholders’ equity; qualifying noncumulative perpetual preferred stock; qualifying cumulative perpetual preferred stock (subject to some limitations); and minority interests in the common equity accounts of consolidated subsidiaries, less goodwill and specified intangible assets.
	Tier 2, or “supplementary,” capital consists of the sum of: the allowance for loan losses; perpetual preferred stock and related surplus; hybrid capital instruments; unrealized holding gains on equity securities; perpetual debt and mandatory convertible debt securities; term subordinated debt, including related surplus; and intermediate-term preferred stock, including related securities.

      Under the Federal Reserve’s capital guidelines, bank holding companies are required to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8%, of which at least 4% must be in the form of Tier 1 capital. The Federal Reserve has established a minimum ratio of Tier 1 capital to total assets of 3% for strong bank holding companies (those rated a composite “1” under the Federal Reserve’s rating system). For all other bank holding companies, the minimum ratio of Tier 1 capital to total assets is 4%. In addition, the Federal Reserve continues to consider the Tier 1 leverage ratio (after deducting all intangibles) in evaluating proposals for expansion or new activities.

      In its capital adequacy guidelines, the Federal Reserve emphasizes that the foregoing standards are supervisory minimums and that banking organizations generally are expected to operate well above the minimum ratios. These guidelines also state that banking organizations experiencing growth, whether internally or by making acquisitions, are expected to maintain strong capital positions substantially above the minimum levels.

      As of December 31, 2003, the Company’s and the Bank’s capital exceeded the Federal Reserve’s and FDIC’s “well capitalized” guidelines. See Note 11 to Item 8 of this Form 10-K.

      Acquisitions. The BHC Act requires prior Federal Reserve approval for, among other things, the acquisition by a bank holding company of direct or indirect ownership or control of more than 5% of the voting shares or substantially all the assets of any bank, or for a merger or consolidation of a bank holding company with another bank holding company. With limited exceptions, the BHC Act prohibits a bank holding company from acquiring direct or indirect ownership or control of voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in any activity other than banking or managing

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      Interstate Banking and Branching Legislation. Under the Riegle-Neal Interstate Banking and Efficiency Act of 1994 (the “Interstate Banking Act”), adequately capitalized and adequately managed bank holding companies are allowed to acquire banks across state lines subject to various limitations. In addition, under the Interstate Banking Act, banks are permitted, under some circumstances, to merge with one another across state lines and thereby create a main bank with branches in separate states. After establishing branches in a state through an interstate merger transaction, a bank may establish and acquire additional branches at any location in the state where any bank involved in the interstate merger could have established or acquired branches under applicable federal and state law.

      Ownership Limitations. Under the Illinois Banking Act, any person who acquires more than 10% of the Company’s common stock may be required to obtain the prior approval of the commissioner of the Illinois Office of Banks and Real Estate (the “Commissioner”). Under the Change in Bank Control Act, a person may be required to obtain the prior regulatory approval of the Federal Reserve before acquiring the power to directly or indirectly control the management, operations or policies of the Company or before acquiring control of 10% or more of our outstanding common stock.

      Dividends. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies. In the policy statement, the Federal Reserve expressed its view that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which could only be funded in ways that weakened the bank holding company’s financial health, such as by borrowing. Additionally, the Federal Reserve possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to prohibit or limit the payment of dividends by banks and bank holding companies.

      Under a longstanding policy of the Federal Reserve, the Company is expected to act as a source of financial strength to the Bank subsidiary and to commit resources to support it. The Federal Reserve takes the position that in implementing this policy, it may require the Company to provide financial support when the Company otherwise would not consider itself able to do so.

      In addition to the restrictions on dividends imposed by the Federal Reserve, Delaware law also places limitations on the Company’s ability to pay dividends. For example, the Company may not pay dividends to shareholders if, after giving effect to the dividend, the Company would not be able to pay its debts as they become due. Because a major source of the Company’s cash flow is the dividends from the Bank, the Company’s ability to pay dividends will depend on the amount of dividends paid by the Bank. The Company cannot be sure that the Bank will pay such dividends.

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Bank Regulation

      The Bank is subject to supervision and examination by the commissioner of the Illinois Office of Banks and Real Estate (the “Commissioner”) and, as a non-Federal Reserve member, FDIC-insured bank, to supervision and examination by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is also a member of the Federal Home Loan Bank (“FHLB”) of Chicago. The Federal Deposit Insurance Act (“FDIA”) requires prior FDIC approval for any merger and/or consolidation by or with another depository institution, as well as for the establishment or relocation of any bank or branch office. The FDIA also gives the power to the FDIC to issue cease and desist orders. A cease and desist order could either prohibit a bank from engaging in certain unsafe and unsound bank activity or could require a bank to take certain affirmative action. The FDIC also supervises compliance with the federal law and regulations which place restrictions on loans by FDIC-insured banks to an executive officer, director or principal shareholder of the bank, the bank holding company which owns the bank, and any subsidiary of such bank holding company. The FDIC also examines the Bank for its compliance with statutes which restrict and, in some cases, prohibit certain transactions between a bank and its affiliates. Among other provisions, these laws place restrictions upon: extensions of credit between the bank holding company and any non-banking affiliates; the purchase of assets from affiliates; the issuance of guarantees, acceptances or letters of credit on behalf of affiliates; and, investments in stock or other securities issued by affiliates or acceptance thereof as collateral for an extension of credit. Also, the Bank is subject to restrictions with respect to engaging in the issuance, underwriting, public sale or distribution of certain types of securities and to restrictions upon: the nature and amount of loans which it may make to a single borrower (and, in some instances, a group of affiliated borrowers); the nature and amount of securities in which it may invest; the amount of investment in the Bank premises; and the manner in and extent to which it may borrow money.

      Furthermore, all banks are affected by the credit policies of the Federal Reserve, which regulates the national supply of bank credit. Such regulation influences overall growth of bank loans, investments, and deposits and may also affect interest rates charged on loans and paid on deposits. The Federal Reserve’s monetary policies have had a significant effect on the operating results of commercial banks in the past and we expect this trend to continue in the future.

      Dividends. The Illinois Banking Act provides that an Illinois bank may not pay dividends of an amount greater than its current net profits after deducting losses and bad debts while such bank continues to operate a banking business. For the purpose of determining the amount of dividends that an Illinois bank may pay, bad debts are defined as debts upon which interest is past due and unpaid for a period of six months or more unless such debts are well-secured and in the process of collection.

      In addition to the foregoing, the ability of the Company and the Bank to pay dividends may be affected by the various minimum capital requirements and the capital and non-capital standards established under the Federal Deposit Insurance Corporation Improvements Act of 1991 (“FDICIA”), as described below.

      Federal Reserve System. The Bank is subject to Federal Reserve regulations requiring depository institutions to maintain noninterest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve regulations generally require 3% reserves on the first $45.4 million of transaction accounts plus 10% on the remainder. The first $6.6 million of otherwise reservable balances (subject to adjustments by the Federal Reserve) are exempted from the reserve requirements. The Bank’s balance in vault cash is available to satisfy reserve requirements. At December 31, 2003, the Bank is in compliance with these requirements.

      Standards for Safety and Soundness. The FDIA, as amended by FDICIA and the Riegle Community Development and Regulatory Improvement Act of 1994, requires the FDIC, together with the other federal bank regulatory agencies, to prescribe standards of safety and soundness, by regulations or guidelines, relating generally to operations and management, asset growth, asset quality, earnings, stock valuation, and compensation. The FDIC and the other federal bank regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards pursuant to FDICIA. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits. In general, the guidelines require, among

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      Prompt Corrective Action. FDICIA requires the federal banking regulators, including the Federal Reserve and the FDIC, to take prompt corrective action with respect to depository institutions that fall below minimum capital standards and prohibits any depository institution from making any capital distribution that would cause it to be undercapitalized. Institutions that are not adequately capitalized may be subject to a variety of supervisory actions, including restrictions on growth, investment activities, capital distributions and affiliate transactions, and will be required to submit a capital restoration plan which, to be accepted by the regulators, must be guaranteed in part by any company having control of the institution (for example, the company or a stockholder controlling the company). In other respects, FDICIA provides for enhanced supervisory authority, including greater authority for the appointment of a conservator or receiver for critically under-capitalized institutions. The capital-based prompt corrective action provisions of FDICIA and its implementing regulations apply to FDIC-insured depository institutions. However, federal banking agencies have indicated that, in regulating bank holding companies, the agencies may take appropriate action at the holding company level based on their assessment of the effectiveness of supervisory actions imposed upon subsidiary insured depository institutions pursuant to the prompt corrective action provisions of FDICIA. Also, under FDICIA, insured depository institutions with assets of $500 million or more at the beginning of a fiscal year, must submit an annual report for that year, including financial statements and a management report, to each of the FDIC, any appropriate federal banking agency, and any appropriate bank supervisor. The Bank had assets of $500 million or more at the beginning of fiscal year 2003, and must therefore provide an annual report as required by FDICIA.

      As of December 31, 2003, the Company and the Bank had capital in excess of the requirements for a “well-capitalized” institution under the prompt corrective action provisions of FDICIA.

      Insurance of Deposit Accounts. Under FDICIA, as an FDIC-insured institution, the Bank is required to pay deposit insurance premiums based on the risk it poses to the Bank Insurance Fund (“BIF”). The FDIC has authority to raise or lower assessment rates on insured deposits in order to achieve statutorily required reserve ratios in the insurance funds and to impose special additional assessments. Each depository institution is assigned to one of three capital groups: “well capitalized,” “adequately capitalized” or “undercapitalized.” Within each capital group, institutions are assigned to one of three supervisory subgroups: “A” (institutions with few minor weaknesses), “B” (institutions which demonstrate weaknesses which, if not corrected, could result in significant deterioration of the institution and increased risk of loss to BIF), and “C” (institutions that pose a substantial probability of loss to BIF unless effective corrective action is taken). Accordingly, there are nine combinations of capital groups and supervisory subgroups to which varying assessment rates would be applicable. An institution’s assessment rate depends on the capital category and supervisory category to which it is assigned. Effective, January 1, 2004 the FDIC Assessment Rate Schedule for BIF member banks ranged from zero for “well capitalized” institutions to $.27 per $100 of deposits for “undercapitalized” institutions. During 2003, the Bank was classified as “well capitalized” and was assessed the BIF semi-annual rate of zero.

      Deposits insured by BIF are also assessed interest on bonds issued in the late 1980’s by the Financing Company to recapitalize the now defunct Federal Savings and Loan Insurance Company (“FICO bonds”). The Company’s deposit insurance for the FICO bonds was $201,000 in 2003.

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      Deposit insurance may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Such termination can only occur, if contested, following judicial review through the federal courts. Management is not aware of any practice, condition or violation that might lead to termination of deposit insurance.

      Community Reinvestment. Under the Community Reinvestment Act (“CRA”), a financial institution has a continuing and affirmative obligation to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. However, institutions are rated on their performance in meeting the needs of their communities. Performance is judged in three areas: (a) a lending test, to evaluate the institution’s record of making loans in its assessment areas; (b) an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and business; and (c) a service test, to evaluate the institution’s delivery of services through its branches, ATMs and other offices. The CRA requires each federal banking agency, in connection with its examination of a financial institution, to assess and assign one of four ratings to the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by the institution, including applications for charters, branches and other deposit facilities, relocations, mergers, consolidations, acquisitions of assets or assumptions of liabilities, and savings and loan holding company acquisitions. The CRA also requires that all institutions make public disclosure of their CRA ratings.

      The Bank was assigned a “satisfactory” rating as a result of its last CRA examination in May 2002.

      Bank Secrecy Act. Under the Bank Secrecy Act (“BSA”), a financial institution is required to have systems in place to detect certain transactions, based on the size and nature of the transaction. Financial institutions are generally required to report cash transactions involving more that $10,000 to the United States Treasury. In addition, financial institutions are required to file suspicious activity reports for transactions that involve more than $5,000 and which the financial institution knows, suspects or has reason to suspect involves illegal funds, is designed to evade the requirements of the BSA or has no lawful purpose. The USA PATRIOT Act of 2001, enacted in response to the September 11, 2001 terrorist attacks, requires bank regulators to consider a financial institution’s compliance with the BSA when reviewing applications. Final rules implementing customer identification procedures to be followed by financial institutions have been released and must be complied with by all financial institutions subject to the BSA.

      Compliance with Consumer Protection Laws. The Bank is subject to many federal consumer protection statutes and regulations including the CRA, the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act and the Home Disclosure Act. Among other things, these acts: require banks to meet the credit needs of their communities; require banks to disclose credit and deposit terms in meaningful and consistent ways; prohibit discrimination against an applicant in any consumer or business credit transaction; prohibit discrimination in housing-related lending activities; require banks to collect and report applicant and borrower data regarding loans for home purchases or improvement projects; require lenders to provide borrowers with information regarding the nature and cost of real estate settlement; prohibit certain lending practices and limit escrow account amounts with respect to real estate transactions; and prescribe possible penalties for violations of the requirements of consumer protection statutes and regulations.

      Enforcement Actions. Federal and state statutes and regulations provide financial institution regulatory agencies with great flexibility to undertake an enforcement action against an institution that fails to comply with regulatory requirements, particularly capital requirements. Possible enforcement actions range from the imposition of a capital plan and capital directive to civil money penalties, cease and desist orders, receivership, conservatorship or the termination of deposit insurance.

      The Company is also subject to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”). The FIRREA broadened the regulatory powers of federal bank regulatory agencies. The

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      One of the provisions of FIRREA contains a “cross-guarantee” provision which can impose liability on the Company for losses incurred by the FDIC in connection with assistance provided to or the failure of the Company’s insured depository institution.

      Impact of the Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act (the “GLB Act”), among other things, establishes a comprehensive framework to permit affiliations among commercial banks, insurance companies and securities firms. Also, it permits a bank holding company which meets certain criteria to certify that it satisfies such criteria and become a financial holding company and thereby engage in a broader range of activity than permitted a bank holding company.

      The GLB Act also imposes requirements on financial institutions with respect to customer privacy by generally prohibiting disclosure of non-public personal information to non-affiliated third parties unless the customer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to customers annually.

      To the extent the GLB Act permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This consolidation could result in a growing number of larger financial institutions that offer a wider variety of financial services than the Company currently offers and that can aggressively compete in the market the Company currently serves.

      The Company’s offices are located in Oak Brook, Illinois in the headquarters of Oak Brook Bank. The Company leases space from the Bank. The Bank and its branches conduct business in both owned and leased premises. The Bank currently operates from ten owned and seven leased properties. The Company believes its facilities in the aggregate are suitable and adequate to operate its banking business. For information concerning lease obligations, see Note 5 to Item 8 of this Form 10-K.

      From time to time, the Company or its subsidiaries may be party to various legal proceedings arising in the normal course of business. Since the Bank acts as a depository of funds, it may be named from time to time as a defendant in various lawsuits (such as garnishment proceedings) involving claims to the ownership of funds in particular accounts. At December 31, 2003, neither the Company nor any of its subsidiaries is a party to any pending material legal proceedings that we believe will have a material adverse effect on our business, results of operations, financial condition or cash flows.

      There were no matters submitted to a vote of shareholders during the fourth quarter of 2003.

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PART II

      The Company’s Common Stock trades on the NASDAQ National Market under the symbol FOBB. As of February 5, 2004, there were 398 holders of record and approximately 1,773 beneficial shareholders. See Notes 10, 12 and 14 to Item 8 of this Form 10-K for additional shareholder information.

Stock Data⁽¹⁾

(1)	Common Stock data has been restated to give effect to the three-for-two stock split effective in August 2003.
(2)	The prices shown represent the high and low closing sales prices for the quarter.

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      The consolidated financial information which reflects a summary of the operating results and financial condition of First Oak Brook Bancshares, Inc. for the five years ended December 31, 2003 is presented in the following table. All share and per share data has been restated to give effect to the three-for-two stock split effective in August 2003. This summary should be read in conjunction with consolidated financial statements and accompanying notes included in Item 8 of this report. A more detailed discussion and analysis of the Company’s financial condition and operating results is presented in Item 7 of this report.

Earnings Summary and Selected Consolidated Financial Data

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(1)	Common Stock data has been restated to give effect to the three-for-two stock split effective in August 2003.
(2)	On May 4, 1999, the shareholders approved the reclassification of the Common Stock into Class A Common Stock on a one for one basis. As a result, the Class A Common Stock is now the only class of outstanding Common Stock and has been renamed “Common Stock”. Historical dividend and price information shown is that of the former Class A Common Stock.

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      The following discussion and analysis provides information about the financial condition and results of operations of First Oak Brook Bancshares, Inc. (the Company) for the years ended December 31, 2003, 2002 and 2001. All share and per share data has been restated to give effect to the three-for-two stock split effective in August 2003. This discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and accompanying notes included in Item 8 of this report.

EXECUTIVE SUMMARY

      The Company, through its wholly-owned bank subsidiary, operates a single line of business encompassing general retail and commercial banking business primarily in the Chicago metropolitan area. The Company is located in a highly competitive market, facing competition for banking and related financial services from many financial intermediaries. Competition amongst financial intermediaries is generally expressed in terms of interest rates charged on loans and paid on deposits, the price of products and services a bank can offer and the variety of financial services offered. The Company offers a full range of banking services such as demand, savings and time deposits, corporate treasury management services, merchant credit card processing, commercial lending products and personal lending products. The Company also maintains a full-service investment management and trust department, and in 2003, formed an investment sales division to execute customer investment transactions in U.S. Treasury, U.S. Government agency, corporate and municipal securities primarily for commercial businesses, not-for-profit organizations, governmental entities and high net worth families.

      The profitability of the Company’s operations depends on net interest income, provision for loan losses, noninterest income, and noninterest expense. Net interest income is dependent on the amounts and yields of interest-earning assets as compared to the amounts and rates on interest-bearing liabilities. Net interest income is sensitive to changes in market rates of interest as well as to the execution of the Company’s asset/liability management strategy. The provision for loan losses is affected by changes in the loan portfolio, management’s assessment of the collectibility of the loan portfolio, loss experience, as well as economic and market factors.

      Noninterest income consists primarily of treasury management, merchant and trust fee income, and to a lesser extent, fees for ancillary banking services. Noninterest expenses are heavily influenced by the growth of internal operations. The Company’s growth directly affects the majority of the Company’s expense categories. The Company opened three new branches in fiscal year 2003, one each in Countryside, Graue Mill and St. Charles, which added new deposits and increased noninterest expenses. The Company’s primary growth strategy continues to revolve around the expansion of branch locations in the Chicago metropolitan area while maintaining a strong capital position to enhance the confidence of our customers, shareholders and banking regulators. The Company has sought to maximize our internal growth opportunities by positioning the Company as one of the leading Chicago area community banks.

Earnings

      The Company’s consolidated net income, earnings per share and selected ratios for 2003, 2002 and 2001 were as follows:

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      Set forth below are significant items that occurred during 2003 and some related 2002 discussion:

	•	Assets at year-end grew to $1.85 billion, up 16% over 2002.
	•	Equity increased to $120.9 million, up 8% over 2002.
	•	Cash dividends were increased twice in 2003, a 47% overall hike; FOBB share price increased 43% to $30.01 per share at year end; and a three-for-two stock split was effected in August 2003.
	•	Net income is up $7.9 million in 2003. The Company’s 2002 net income was depressed due primarily to a significant loss from an apparent fraud on a construction loan. (See “Asset Quality”).
	•	Net interest income increased $3.8 million. Volume of average earning assets increased $139.4 million; average investments rose $190.3 million and average loans fell $35.8 million.
	•	Net interest margin went down 8 basis points to 3.36% due to lower interest rates and a change in the asset mix partially offset by approximately $1.2 million in additional loan fees, prepayment penalties and accretion remaining on security calls.
	•	Treasury management fees went down $561,000 primarily due to the loss of one significant customer.
	•	Trust fees rose $439,000 due to $150 million increase in discretionary assets under management.
	•	Gain on mortgages sold reached $1 million, up $190,000 from 2002, due to high volume of refinancings in the low interest rate environment.
	•	The sale of covered call options provided income of $1.2 million, up $772,000 over 2002.
	•	Income from bank owned life insurance went up $645,000 over 2002.
	•	Countryside, Graue Mill and St. Charles branches opened in 2003, adding $90.4 million in new deposits and increasing noninterest expenses.
	•	The luxury 24 unit condominium construction project held in OREO was substantially completed and an additional write-down of $1.4 million was taken during 2003. As of March 8, 2004, ten units and 25 parking spaces have been sold, of which five units and eighteen parking spaces are closed and occupied.
	•	Total loans on the Management Watch list (including commitments) declined to $9.2 million at December 31, 2003 from $32.0 million at December 31, 2002, a $22.8 million improvement.

      See “Results of Operations” for further explanation of the Company’s 2003 performance.

Application of Critical Accounting Policies

      The Company has established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of the Company’s consolidated financial statements. The significant accounting policies of the Company are described in the footnotes to the consolidated financial statements. Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience, projected results and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.

      The Company believes the policies that govern the allowance for loan losses and the deferred tax assets and liabilities are critical accounting policies that require the most significant judgments and estimates used in preparation of its consolidated financial statements.

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      Management of the Bank prepares a detailed analysis, at least quarterly, reviewing the adequacy of its allowance for loan losses and, when appropriate, recommends an increase or decrease in its provision for loan losses. The quarterly analysis is divided into two segments: the allocated portion for specific loans and loan categories and the unallocated portion which is not specifically related to any specific segment of the portfolio.

      The analysis to determine the allocated portion of the allowance is again divided into two parts. The first part involves primarily an estimated calculation of losses on loans on the Management Watch list. The Company’s Management Watch list includes all nonaccrual loans, commercial nonperforming loans and potential problem loans and related commitments. Although the Management Watch list includes the Company’s property in OREO, this asset is reviewed individually and not included in the allowance for loan loss calculation (See “Asset Quality”). Loans on the Management Watch list are classified as “special mention”, “substandard”, “doubtful”, or “loss”. An asset is classified as substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as Loss are those considered uncollectible and requiring charge-off. Assets that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that may or may not be within the control of the customer are deemed to be Special Mention. The second part of the allocated portion involves primarily a calculation of the Bank’s actual net charge-off history (excluding the apparent fraud loss in 2002) averaged with industry net charge-off history by major loan categories. The Bank also employs a rating system for loans in its Commercial Lending and Commercial Real Estate departments. Loans that are rated in certain categories may require a higher allocation.

      The unallocated portion of the reserve involves a higher degree of subjectivity in its determination. The Bank considers its portfolio composition, loan growth, management capabilities, economic trends, credit concentrations, industry risks, underlying collateral values and the opinions of bank management. Accordingly, because each of these criteria is subject to change, the allocation of the allowance is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the portfolio.

      In order to identify potential risks in the loan portfolio and determine the necessary provision for loan losses, detailed information is obtained from the following sources:

	•	Monthly reports prepared by the Bank’s management and reviewed by the loan committee which contain information on the overall characteristics of the loan portfolio, including delinquencies, nonaccruals and specific analysis of potential problem loans that require special attention (i.e. “Management Watch list”);
	•	Examinations of the loan portfolio of the Bank by Federal and State regulatory agencies, including Shared National Credit reviews of syndicated loans;
	•	Reviews by third-party credit review consultants.

      For additional disclosures regarding the allowance for loan losses, refer to the section titled “Allowance for Loan Losses” in this Form 10-K.

      The Company accounts for income tax expense by applying an estimated effective tax rate to its pre-tax income. The effective tax rate is based on management’s judgments and estimates regarding permanent differences in the treatment of specific items of income and expense for financial statement and income tax purposes. In addition, the Company recognizes deferred tax assets and liabilities based on management’s

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      The Company must also assess the likelihood that any deferred tax assets will be realized through the reduction or refund of taxes in future periods and establish a valuation allowance for those assets for which recovery is unlikely. In making this assessment, management must make judgments and estimates regarding the ability to realize the asset through carryback to taxable income in prior years, the future reversal of existing taxable temporary differences, future taxable income, and the possible application of future tax planning strategies. While the Company has determined that a valuation allowance is not required for all deferred tax assets, there is no guarantee that these assets are realizable. For additional disclosures on income taxes, see the section titled “Income Tax Expense” in addition to Note 9 to Item 8 of this Form 10-K.

RESULTS OF OPERATIONS

Net Interest Income

      Net interest income is the difference between interest earned on loans, investments, and other earning assets and interest paid on deposits, borrowings 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 shareholders’ equity, the effective rate paid for all funding sources is lower than the rate paid on interest-bearing liabilities alone.

      Net interest income, on a tax equivalent basis, increased $3,515,000, or 7%, as compared to 2002. This increase is primarily attributable to a 10% increase in average earning assets partially offset by an 8 basis point decrease in the net interest margin to 3.36% for 2003 from 3.44% for 2002. Since the Company’s average deposits grew by $126.9 million, loan payoffs were high and loan demand was soft throughout much of 2003, the growth in earning assets came primarily from investment securities. The changes in net interest income and the net interest margin were primarily the result of the following:

RATE

	•	The yield on average earning assets decreased 72 basis points to 5.22%, while the cost of deposits and other borrowed funds decreased 80 basis points to 2.25% for 2003. The Federal Reserve reduced interest rates by 50 basis points late in 2002 and another 25 basis points late in June 2003, resulting in an average prime rate for 2003 of 4.12% as compared to 4.68% for 2002. Although the Company uses various indexes (including prime) to price loans, this decrease in prime was indicative of the general interest rate environment.
	•	As a result of the low interest rate environment, the expected margin compression was partially offset by increases in loan fees of $1,033,000 in 2003 as compared to 2002. Although loan fee income is a normal part of the business, the fees associated with the prepayment of loans and contingent fee arrangements are less predictable and can result in a spike in earnings since these fees are recorded in income when received. The margin was also boosted by accretion income of $196,000 on security calls. Since the Company’s policy is to accrete discounts to maturity, any remaining discount on a called security is immediately accreted to income.

VOLUME

	•	Total average earning assets increased $139.4 million, or 10%, as compared to 2002. The Company’s average securities portfolio increased by $190.3 million, or 46%, and consists of increases in U.S. Government agency securities ($136.2 million), U.S. Treasury securities ($31.2 million), and corporate and other securities ($23.9 million), offset by a decrease in municipal securities ($1.0 million).

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		The increase in corporate and other securities is primarily due to the purchase of $30.0 million of FHLB of Chicago stock. See “Investment Securities” for further analysis.
	•	Average loans for 2003 decreased $35.8 million, or 4%, as compared to 2002. The decrease is primarily attributable to high payoffs resulting in decreases in construction loans ($39.7 million), commercial loans ($10.0 million), and residential mortgage loans ($9.8 million), offset by growth in home equity loans ($15.3 million) and indirect vehicle loans ($10.5 million). Payoffs slowed and loan demand picked up towards the end of 2003, recouping most of the decrease experienced earlier in the year. The yield on loans dropped 65 basis points as compared to 2002. See “Loans” for further analysis.
	•	Average Fed funds sold and interest-bearing deposits with banks decreased $15.1 million due to a decrease in short-term debt, and cash flows from deposit growth and loan repayments being invested in readily marketable U.S. Government agency securities rather than in the Fed funds market.
	•	Average interest-bearing liabilities increased $125.7 million, or 11%, as compared to 2002. Average interest-bearing deposits increased $126.9 million primarily due to growth in time deposits ($77.9 million) and in savings and NOW accounts ($69.5 million), offset by a decrease in money market accounts ($20.4 million). Time deposits were augmented by a $55.8 million average increase in public funds and a $13.4 million average increase in brokered CDs; savings and NOW growth was spurred by the promotion of higher rate products and the increase in 2003 includes average deposits of $34.2 million from the new Countryside office (opened in January 2003), $5.4 million from the new Graue Mill office (opened in May 2003), and $2.5 million from the new St. Charles office (opened in October 2003).
	•	Average short-term debt decreased $15.6 million due primarily to an $8.8 million average decrease in the treasury, tax and loan note and a $7.9 million average decrease in commercial repurchase agreements.
	•	Average Federal Home Loan Bank (“FHLB”) of Chicago borrowings increased $8.4 million due primarily to advances obtained late in 2002 to finance the buildout of property now carried in Other Real Estate Owned (“OREO”). See “Asset Quality.”
	•	Average Trust Preferred Capital Securities (“TRUPS”) increased $6.0 million through a $12 million participation in a pooled trust preferred offering late in the second quarter of 2002 and a $5 million participation in the fourth quarter of 2003. See Note 8 to Item 8 of this Form 10-K for more information.
	•	Average demand deposits increased $30.4 million due primarily to new customer volume.

      Net interest income, on a tax equivalent basis, increased $8,147,000 or 20% from 2001. This increase is due to a 14% increase in average earning assets and an 18 basis point increase in the net interest margin to 3.44% in 2002 from 3.26% in 2001. The increase in net interest income and the net interest margin was primarily the result of the following:

RATE

	•	For 2002, the yield on average earning assets decreased 117 basis points to 5.94%, while the cost of deposits and other borrowed funds decreased 168 basis points to 3.05%. The Federal Reserve reduced interest rates by 50 basis points late in 2002 and 475 basis points throughout 2001, resulting in an average prime rate of 4.68% for the year ended December 31, 2002 as compared to 6.92% for 2001. In 2002, the net interest margin continued to benefit from the Federal Reserve interest rate reductions since the Company’s deposits and other interest-bearing liabilities repriced downward more quickly than its loans and investments.

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VOLUME

	•	Total average earning assets increased $171.7 million, or 14%, as compared to 2001. The Company’s average securities portfolio increased $108.5 million, or 35%, primarily due to the growth in U.S. Government agency securities ($107.2 million) and corporate and other securities ($13.8 million), offset by decreases in U.S. Treasury ($2.6 million) and municipal ($9.9 million) securities.
	•	Average loans grew $56.5 million, or 6%, in comparison to 2001. The increase is primarily attributable to growth in commercial real estate ($30.7 million), construction loans ($18.7 million), indirect vehicle loans ($14.7 million) and home equity loans ($10.0 million), offset by a decrease in residential mortgages ($15.9 million).
	•	Average interest-bearing liabilities increased $146.6 million, or 15%, as compared to 2001. Average interest-bearing deposits increased $136.9 million primarily due to the promotion of the new Advance Interest CD product ($77.6 million), an increase in public funds ($17.7 million) and growth in savings, NOW and money market accounts ($46.4 million). The Advance Interest CD pays interest in advance rather than in arrears. The Bolingbrook office, opened in March 2002, averaged $14.0 million in deposits for 2002.
	•	Average FHLB of Chicago borrowings increased due primarily to new advances intended for the buildout of the property in OREO.
	•	Average TRUPS increased due to the Company’s $12 million participation in a pooled trust preferred offering issued late in the second quarter of 2002.

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      The following table presents the average interest rate on each major category of interest-earning assets and interest-bearing liabilities for 2003, 2002, and 2001.