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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 2004
Commission file number 0-14468
FIRST OAK BROOK BANCSHARES, INC.
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DELAWARE |
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36-3220778 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
1400 Sixteenth Street, Oak Brook, IL 60523 - Telephone
Number (630) 571-1050
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities Registered Pursuant to Section 12(g) of the
Act:
Common Stock, $2.00 par value
Preferred Share Purchase Rights
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. 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, 2004
was approximately: $193,353,148 based upon the closing price of
the Company’s common stock of $30.30 per share as reported
by NASDAQ on June 30, 2004. As of March 10, 2005,
9,772,548 shares of common stock were outstanding.
Documents incorporated by reference
Portions of the Company’s Proxy Statement for its 2005
Annual Meeting of Shareholders to be filed by April 8, 2005
are incorporated by reference in Part III.
Form 10-K Table of Contents
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PART I
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Business and Statistical Disclosure by Bank Holding
Companies |
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.
Effective May 26, 2004, the Company became a Financial
Holding Company pursuant to the Gramm-Leach-Bliley Act of 1999.
The Company is headquartered and its largest banking office is
located in Oak Brook, Illinois, twenty miles west of downtown
Chicago. The Company employs 322 full-time and
37 part-time employees which represent 342 full-time
equivalent employees at December 31, 2004.
The Company has authorized 16,000,000 shares of Common Stock
with a par value of $2.00. As of December 31, 2004, the
Company had total assets of $2.083 billion, loans of
$1.072 billion, deposits of $1.715 billion, and
shareholders’ equity of $133.8 million.
The Company owns all of the outstanding capital stock of Oak
Brook Bank (the “Bank”) in Oak Brook, Illinois, which
is an Illinois state-chartered bank. 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’s
business is conducted by the following wholly-owned subsidiaries:
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FOBB Statutory Trust I, FOBB Statutory Trust II and FOBB
Statutory Trust III: These subsidiaries were 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 on
January 1, 2004. See Note 1 to the Company’s
financial statements under Item 8 of this Form 10-K
for more information. |
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First Oak Brook Capital Markets, Inc.
(“FOBCM”): FOBCM was incorporated in April 2004
and in January 2005, obtained approval to operate as a
broker/dealer member of the National Association of Securities
Dealers, Inc. (“NASD”). During the second quarter of
2005, FOBCM will assume the current securities transaction
activities of the investment sales center of the Bank and will
be able to engage in expanded securities trading and
underwriting activities. |
The Bank owns the following wholly-owned subsidiaries:
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Oak Real Estate Development Corporation: This subsidiary
was formed in 2000 to acquire, develop and rehabilitate single
family and multifamily properties in Illinois. |
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West Erie, LLC: This subsidiary was formed in 2002 solely
to develop and market a luxury condominium project acquired by
the Bank and held in Other Real Estate Owned. See “Asset
Quality” in Item 7 of this Form 10-K for more
information. |
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OBB Real Estate Holdings, LLC and OBB Real Estate
Investments, LLC: OBB Real Estate Holdings, LLC, a
wholly-owned subsidiary of the Bank, owns substantially all the
shares of OBB Real Estate Investments, LLC. These subsidiaries
were formed in October 2003 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 line of
business encompassing a 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 an investment
sales center. Currently, the investment sales center executes
customer investment transactions in U.S. Treasury, U.S.
Government agency, corporate and municipal securities and mutual
funds primarily for commercial businesses, not-for-profit
organizations, governmental entities and high net worth
families. During the second
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quarter of 2005, the services and investment products of the
investment sales center will be assumed by and offered through
FOBCM.
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. In March 2005, the Bank
expects to open its eighteenth office in Darien, Illinois
(DuPage County). See “Branch Expansion” in Item 7
of this Form 10-K for additional information regarding
planned expansion. The Bank offers a call center at
800-536-3000. The Bank’s 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. The Bank also
allows its customers access to networked ATM’s
(STAR & CIRRUS) for a fee.
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 its 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 both federal and state
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. When a credit
request exceeds the loan officer’s approval authority,
approval by a senior lending officer, bank loan committee,
directors’ loan committee and/or the full board of
directors is required.
Competition
The Bank’s offices are part of the Chicago banking market,
as defined by the Federal Reserve Bank of Chicago. At
June 30, 2004 (the most recent date for which statistics
are available), the Chicago banking market consisted of 338
financial institutions (commercial banks and thrift
institutions) with total deposits of $220.5 billion. Based
on total deposits, the Bank was the eighteenth largest financial
institution within the Chicago banking market. At June 30,
2004, the Bank’s market share was approximately 5.9% of the
total deposits in 75 DuPage County financial institutions
(representing 337 offices), an approximate .6% market share
of total deposits in 49 Kane County financial institutions
(representing 161 offices), an approximate .5% market share
of total deposits in 51 Will County financial institutions
(representing 174 offices) and an approximate .2% market
share of total deposits in 202 Cook County financial
institutions (representing 1,387 offices).
The Bank is located in a highly competitive market, facing
competition for banking and related financial services from many
financial intermediaries, including banks, thrifts, 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, Bank
of America and National City) aggressive branch expansion within
the Chicago banking market. In doing so, these banks are
competing with the Bank not only for retail and commercial
customers, but also for competent bank personnel.
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Available Information
The Company’s 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, the
website 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.
Regulation and Supervision
General
Banking is a highly regulated industry both at the federal and
state levels. 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 effective
May 26, 2004, the Company became a Financial Holding
Company under the BHC Act. By virtue of being a Financial
Holding Company, the Company is permitted to expand the range of
financial activities in which it may engage. Such additional
activities include underwriting, dealing in and otherwise making
a market in securities and underwriting, brokering and selling
insurance. The Company is subject to regulation under the
federal banking laws, federal securities laws and Delaware law.
Supervision and examination of the Company under the federal
banking laws are conducted by the Federal Reserve. The Bank is
supervised and regulated by the Federal Deposit Insurance
Corporation and the Illinois Department of Financial and
Professional Regulation.
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.
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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. |
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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
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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, 2004, the Company’s and the
Bank’s capital exceeded the Federal Reserve’s and
FDIC’s “well capitalized” guidelines. See Note 11
to the Company’s financial statements under Item 8 of
this Form 10-K. As a Financial Holding Company, the Company
would face sanctions, including loss of its status as a
Financial Holding Company, if it or the Bank failed to be
“well capitalized.”
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. As stated
above, the Federal Reserve expects bank holding companies to
maintain strong capital positions while experiencing growth. In
addition, the Federal Reserve, as a matter of policy, may
require a bank holding company to be
“well-capitalized” at the time of filing an
acquisition application and upon consummation of the
acquisition. As previously noted, the Company and the Bank must
be “well-capitalized” for the Company to maintain its
status as a Financial Holding Company.
Under the BHC Act and Federal Reserve regulations, the Company
is prohibited from engaging in tie-in arrangements in connection
with an extension of credit, lease, sale of property, or
furnishing of services. That means that, except with respect to
traditional banking products, the Company may not condition a
client’s purchase of one of its services on the purchase of
another service.
Interstate Banking and Branching Legislation. Under the
Riegle-Neal Interstate Banking and Efficiency Act of 1994 (the
“Interstate Banking Act”), 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 acquiring 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 Department of Financial and
Professional Regulation. 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 the
Company’s 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
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.
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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 always be able or permitted to pay such
dividends.
Bank Regulation
The Bank is subject to supervision and examination by the
commissioner of the Illinois Department of Financial and
Professional Regulation 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 federal law and regulations
which place restrictions on loans by FDIC-insured banks
(including the Bank) to an executive officer, director or
principal shareholder of such bank, the bank holding company
which owns such 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 (including the Bank) 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
Improvement 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 $47.6 million of transaction accounts plus 10% on the
remainder. The first $7.0 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, 2004, the Bank is in compliance with these
requirements.
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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 other things, appropriate
systems and practices to identify and manage the risks and
exposures specified in the guidelines. The guidelines prohibit
excessive compensation as an unsafe and unsound practice and
describe compensation as excessive when the amounts paid are
unreasonable or disproportionate to the services performed by an
executive officer, employee, director or principal stockholder.
In addition, the FDIC adopted regulations that authorize, but do
not require, the FDIC to order an institution that has been
given notice by the FDIC that it is not satisfying the safety
and soundness guidelines to submit a compliance plan. If, after
being so notified, an institution fails to submit an acceptable
compliance plan or fails in any material respect to implement an
accepted compliance plan, the FDIC must issue an order directing
action to correct the deficiency and may issue an order
directing other actions of the types to which an
undercapitalized institution is subject under the “prompt
corrective action” provisions of FDICIA. If an institution
fails to comply with such an order, the FDIC may seek to enforce
its order in judicial proceedings and to impose civil money
penalties. The FDIC and the other federal bank regulatory
agencies have also proposed guidelines for asset quality and
earning standards.
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 2004, and must therefore provide an
annual report as required by FDICIA.
As of December 31, 2004, 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
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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, 2005, 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 2004, 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 $224,000 in 2004.
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 June 2004.
Bank Secrecy Act; USA PATRIOT 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 in excess of
a prescribed amount to the United States Treasury. In addition,
financial institutions are required to file suspicious activity
reports for transactions in excess of a prescribed amount 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 (“Patriot Act”), 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. Financial institutions are required to establish,
implement and train employees with respect to customer
identification procedures to be followed by financial
institutions in conjunction with BSA requirements. Bank
regulatory authorities have been rigorous in monitoring
compliance by banks with the BSA and the Patriot Act, and the
penalties for non-compliance are severe. The Bank has expended
substantial amounts of time and money to train its staff with
respect to compliance measures and to acquire computer software
to enhance such compliance.
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 small business credit transaction; prohibit
discrimination in housing-
9
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 and the Patriot
Act. 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 original, primary
purpose of FIRREA was to address the financial crisis in the
thrift industry through the imposition of strict reforms on that
industry. FIRREA also granted bank holding companies the right
to acquire savings institutions.
One of the provisions of FIRREA contains a
“cross-guarantee” provision which can impose liability
on the Company for losses incurred by the FDIC in connection
with assistance provided to or the failure of 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 criteria are: (i) both the bank
holding company and its insured depository institution(s) being
“well capitalized” and “well managed”;
(ii) the insured depository institution(s) receiving at
least a “satisfactory” examination rating under the
Community Reinvestment Act; and (iii) the bank holding
company filing a declaration with the Federal Reserve that it
seeks to become a Financial Holding Company. Effective
May 26, 2004, the Company satisfied all conditions and
became a Financial Holding Company under the GLB Act. If, in the
future, the criteria set forth in (i) or (ii) above
cease to be satisfied, the Federal Reserve may impose sanctions
on the Company. In the most recent examination of the Company
and the Bank, both criteria were satisfied.
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. The FDIC and the other federal
regulators have promulgated implementing regulations outlining
the duties of financial institutions with regard to customer
privacy. These regulations do not supersede state regulations
regarding privacy, except to the extent that state regulations
conflict with these regulations. The privacy regulations of the
Illinois Banking Act continue to apply to the Bank, except to
the extent that they conflict with the GLB Act and its
implementing regulations.
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 more
aggressively compete in the market the Company currently serves.
First Oak Brook Capital Markets, Inc. (“FOBCM”), the
recently incorporated broker/dealer subsidiary of the Company,
is a member of and subject to regulation by the NASD.
The Company’s principal offices are located in Oak Brook,
Illinois in the headquarters of the Bank. The Company leases
space from the Bank. The Bank and its branches conduct business
in both owned and leased
10
premises. The Bank currently owns ten properties and leases
space at seven other locations. 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 the Company’s financial
statements under Item 8 of this Form 10-K. For
information related to branch activities, see “Branch
Expansion” in Item 7 of this Form 10-K.
|
|
| ITEM 3. |
Legal Proceedings |
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 and divorce proceedings, tax and judgment
liens) involving claims to the ownership of funds in particular
banking accounts. At December 31, 2004, neither the Company
nor any of its subsidiaries is a party to or threatened with any
material legal proceedings that we believe will have a material
adverse effect on our business, results of operations, financial
condition or cash flows.
|
|
| ITEM 4. |
Submission Of Matters To A Vote Of Security Holders |
There were no matters submitted to a vote of shareholders during
the fourth quarter of 2004.
11
PART II
|
|
| ITEM 5. |
Market For Registrant’s Common Equity, Related
Shareholder Matters and Issuer Purchases of Equity
Securities |
The Company’s common stock trades on the NASDAQ Stock
Market under the symbol FOBB. As of February 17,
2005, there were 760 holders of record and approximately 1,952
beneficial shareholders. The table below presents certain per
share information of our common stock for the periods indicated.
See Notes 10, 12 and 14 to the Company’s financial
statements under Item 8 of this Form 10-K for additional
shareholder information.
Stock
Data(1)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Per Share | |
| |
|
| |
| |
|
Diluted | |
|
|
| |
|
Net | |
|
Dividends | |
|
Book | |
|
|
|
Quarter | |
| Quarter Ended |
|
Earnings | |
|
Paid | |
|
Value | |
|
Low Price(2) | |
|
High Price(2) | |
|
End Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
December 31, 2004
|
|
$ |
.49 |
|
|
$ |
.16 |
|
|
$ |
13.33 |
|
|
$ |
31.09 |
|
|
$ |
33.47 |
|
|
$ |
32.41 |
|
|
September 30, 2004
|
|
|
.46 |
|
|
|
.16 |
|
|
|
13.11 |
|
|
|
29.40 |
|
|
|
31.29 |
|
|
|
30.84 |
|
|
June 30, 2004
|
|
|
.48 |
|
|
|
.16 |
|
|
|
11.73 |
|
|
|
28.25 |
|
|
|
31.99 |
|
|
|
30.30 |
|
|
March 31, 2004
|
|
|
.48 |
|
|
|
.14 |
|
|
|
13.09 |
|
|
|
29.55 |
|
|
|
33.70 |
|
|
|
30.51 |
|
|
December 31, 2003
|
|
|
.47 |
|
|
|
.14 |
|
|
|
12.12 |
|
|
|
26.00 |
|
|
|
32.00 |
|
|
|
30.01 |
|
|
September 30, 2003
|
|
|
.47 |
|
|
|
.107 |
|
|
|
11.88 |
|
|
|
22.55 |
|
|
|
27.00 |
|
|
|
24.78 |
|
|
June 30, 2003
|
|
|
.47 |
|
|
|
.107 |
|
|
|
12.65 |
|
|
|
19.84 |
|
|
|
21.99 |
|
|
|
21.99 |
|
|
March 31, 2003
|
|
|
.46 |
|
|
|
.095 |
|
|
|
11.73 |
|
|
|
18.95 |
|
|
|
20.88 |
|
|
|
20.26 |
|
|
|
| (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. |
12
Issuer Purchases of Equity Securities
The following table sets forth information in connection with
purchases made by, or on behalf of, the Company, or any
affiliated purchaser of the Company, of shares of the
Company’s common stock during the quarterly period ended
December 31, 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Total Number | |
|
Maximum Number | |
| |
|
|
|
|
|
of Shares Purchased | |
|
of Shares that may | |
| |
|
Total Number | |
|
|
|
as Part of Publicly | |
|
yet be Purchased | |
| |
|
of Shares | |
|
Average Price | |
|
Announced Plans | |
|
under the Plans or | |
| Period |
|
Purchased(2) | |
|
Paid per Share | |
|
or Programs(2) | |
|
Programs(1) | |
| |
|
| |
|
| |
|
| |
|
| |
|
October 1, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2004
|
|
|
11,653 |
|
|
$ |
30.84 |
|
|
|
11,653 |
|
|
|
116,237 |
|
|
November 1, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2004
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
116,237 |
|
|
December 1, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
116,237 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,653 |
|
|
$ |
30.84 |
|
|
|
11,653 |
|
|
|
116,237 |
|
|
|
| (1) |
In 2000, the Board of Directors approved a stock repurchase
program which authorizes the Company to repurchase up to 300,000
shares of common stock through January 2006 (as extended in
August 2003 and again in January 2005). At December 31,
2004, there are 116,237 shares remaining available for
repurchases under this program. |
| (2) |
Does not include shares tendered to pay withholding tax or the
exercise price of an option. |
13
|
|
| ITEM 6. |
Selected Financial Data |
The consolidated financial information which reflects a summary
of the operating results and financial condition of the Company
for the five years ended December 31, 2004 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
Form 10-K. The information set forth below is not
necessarily indicative of the results of future operations and
should be read in conjunction with the more detailed discussion
and analysis of the Company’s financial condition and
operating results is presented in Item 7 of this
Form 10-K.
Earnings Summary and Selected Consolidated Financial Data
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At and for the years ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands except share data) | |
|
Statement of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$ |
53,411 |
|
|
$ |
51,231 |
|
|
$ |
47,448 |
|
|
$ |
38,916 |
|
|
$ |
33,205 |
|
|
Provision for loan losses
|
|
|
500 |
|
|
|
1,600 |
|
|
|
14,650 |
|
|
|
1,550 |
|
|
|
900 |
|
|
Net interest income after provision for loan losses
|
|
|
52,911 |
|
|
|
49,631 |
|
|
|
32,798 |
|
|
|
37,366 |
|
|
|
32,305 |
|
|
Other income
|
|
|
18,532 |
|
|
|
18,435 |
|
|
|
17,450 |
|
|
|
14,442 |
|
|
|
10,482 |
|
|
Other expenses
|
|
|
43,732 |
|
|
|
41,503 |
|
|
|
35,741 |
|
|
|
31,928 |
|
|
|
27,117 |
|
|
Income before income taxes
|
|
|
27,711 |
|
|
|
26,563 |
|
|
|
14,507 |
|
|
|
19,880 |
|
|
|
15,670 |
|
|
Income tax expense
|
|
|
8,639 |
|
|
|
8,128 |
|
|
|
4,006 |
|
|
|
6,232 |
|
|
|
4,621 |
|
|
Net income
|
|
$ |
19,072 |
|
|
$ |
18,435 |
|
|
$ |
10,501 |
|
|
$ |
13,648 |
|
|
$ |
11,049 |
|
|
Common Stock
Data(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$ |
1.95 |
|
|
$ |
1.92 |
|
|
$ |
1.10 |
|
|
$ |
1.44 |
|
|
$ |
1.15 |
|
|
Diluted earnings per share
|
|
|
1.91 |
|
|
|
1.87 |
|
|
|
1.08 |
|
|
|
1.41 |
|
|
|
1.13 |
|
|
Cash dividends paid per share
|
|
|
.62 |
|
|
|
.449 |
|
|
|
.35 |
|
|
|
.30 |
|
|
|
.29 |
|
|
Book value per share
|
|
|
13.33 |
|
|
|
12.12 |
|
|
|
11.44 |
|
|
|
10.29 |
|
|
|
9.09 |
|
|
Closing price of Common Stock per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
High
|
|
|
33.70 |
|
|
|
32.00 |
|
|
|
22.97 |
|
|
|
17.00 |
|
|
|
12.25 |
|
| |
Low
|
|
|
28.25 |
|
|
|
18.95 |
|
|
|
16.03 |
|
|
|
11.63 |
|
|
|
9.00 |
|
| |
Year-End
|
|
|
32.41 |
|
|
|
30.01 |
|
|
|
20.95 |
|
|
|
16.10 |
|
|
|
11.75 |
|
|
Dividends paid per share to closing price
|
|
|
1.9 |
% |
|
|
1.5 |
% |
|
|
1.7 |
% |
|
|
1.9 |
% |
|
|
2.4 |
% |
|
Closing price to diluted earnings per share
|
|
|
16.97 |
x |
|
|
16.05 |
x |
|
|
19.5 |
x |
|
|
11.4 |
x |
|
|
10.4 |
x |
|
Market capitalization
|
|
$ |
318,292 |
|
|
$ |
290,518 |
|
|
$ |
199,050 |
|
|
$ |
152,402 |
|
|
$ |
111,844 |
|
|
Period end shares outstanding
|
|
|
9,820,811 |
|
|
|
9,680,711 |
|
|
|
9,501,196 |
|
|
|
9,465,947 |
|
|
|
9,518,618 |
|
|
Volume of shares traded
|
|
|
2,183,927 |
|
|
|
2,276,351 |
|
|
|
3,318,996 |
|
|
|
2,318,964 |
|
|
|
3,769,329 |
|
14
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At and for the years ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands except share data) | |
|
Year-End Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
2,082,524 |
|
|
$ |
1,847,815 |
|
|
$ |
1,597,496 |
|
|
$ |
1,386,551 |
|
|
$ |
1,249,272 |
|
|
Loans, net of unearned discount
|
|
|
1,071,655 |
|
|
|
915,678 |
|
|
|
912,081 |
|
|
|
916,645 |
|
|
|
825,020 |
|
|
Allowance for loan losses
|
|
|
8,546 |
|
|
|
8,369 |
|
|
|
7,351 |
|
|
|
6,982 |
|
|
|
5,682 |
|
|
Investment securities
|
|
|
841,077 |
|
|
|
783,471 |
|
|
|
507,485 |
|
|
|
327,389 |
|
|
|
319,985 |
|
|
Demand deposits
|
|
|
265,251 |
|
|
|
250,101 |
|
|
|
247,806 |
|
|
|
211,939 |
|
|
|
221,552 |
|
|
Total deposits
|
|
|
1,714,536 |
|
|
|
1,458,502 |
|
|
|
1,264,731 |
|
|
|
1,077,966 |
|
|
|
978,226 |
|
|
FHLB of Chicago borrowings
|
|
|
161,418 |
|
|
|
161,500 |
|
|
|
102,000 |
|
|
|
86,000 |
|
|
|
81,000 |
|
|
Junior subordinated notes issued to capital
trusts(2)
|
|
|
23,713 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Trust Preferred Capital Securities
(2)
|
|
|
— |
|
|
|
23,000 |
|
|
|
18,000 |
|
|
|
6,000 |
|
|
|
6,000 |
|
|
Shareholders’ equity
|
|
|
133,787 |
|
|
|
120,892 |
|
|
|
111,942 |
|
|
|
99,552 |
|
|
|
87,606 |
|
|
Financial Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
.96 |
% |
|
|
1.11 |
% |
|
|
.71 |
% |
|
|
1.04 |
% |
|
|
.90 |
% |
|
Return on average equity
|
|
|
15.21 |
|
|
|
15.79 |
|
|
|
10.03 |
|
|
|
14.47 |
|
|
|
13.58 |
|
|
Net interest margin
|
|
|
2.89 |
|
|
|
3.36 |
|
|
|
3.44 |
|
|
|
3.26 |
|
|
|
2.99 |
|
|
Net interest spread
|
|
|
2.56 |
|
|
|
2.97 |
|
|
|
2.89 |
|
|
|
2.38 |
|
|
|
1.95 |
|
|
Dividend payout ratio
|
|
|
32.70 |
|
|
|
25.75 |
|
|
|
32.98 |
|
|
|
21.29 |
|
|
|
25.45 |
|
|
Consolidated Capital Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average equity to average total assets
|
|
|
6.30 |
% |
|
|
7.05 |
% |
|
|
7.06 |
% |
|
|
7.22 |
% |
|
|
6.63 |
% |
|
Tier 1 capital ratio
|
|
|
11.57 |
|
|
|
12.52 |
|
|
|
11.06 |
|
|
|
10.03 |
|
|
|
9.75 |
|
|
Total capital ratio
|
|
|
12.20 |
|
|
|
13.26 |
|
|
|
11.73 |
|
|
|
10.72 |
|
|
|
10.35 |
|
|
Capital leverage ratio
|
|
|
7.47 |
|
|
|
8.11 |
|
|
|
7.74 |
|
|
|
7.42 |
|
|
|
7.47 |
|
|
Asset Quality Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans outstanding
|
|
|
.01 |
% |
|
|
.06 |
% |
|
|
.16 |
% |
|
|
.19 |
% |
|
|
.05 |
% |
|
Nonperforming assets to total assets
|
|
|
.49 |
|
|
|
.91 |
|
|
|
.60 |
|
|
|
.14 |
|
|
|
.05 |
|
|
Nonperforming assets to total capital
|
|
|
7.59 |
|
|
|
13.88 |
|
|
|
8.58 |
|
|
|
1.89 |
|
|
|
.67 |
|
|
Allowance for loan losses to total loans outstanding
|
|
|
.80 |
|
|
|
.91 |
|
|
|
.81 |
|
|
|
.76 |
|
|
|
.69 |
|
|
Net charge-offs to average loans
|
|
|
.03 |
|
|
|
.07 |
|
|
|
1.54 |
|
|
|
.03 |
|
|
|
.01 |
|
|
Allowance for loan losses to nonperforming loans
|
|
|
57.74 |
x |
|
|
15.44 |
x |
|
|
5.09 |
x |
|
|
4.03 |
x |
|
|
12.94 |
x |
|
|
| (1) |
Common Stock data has been restated to give effect to the
three-for-two stock split effective in August 2003. |
| (2) |
The Company deconsolidated three statutory trust subsidiaries on
January 1, 2004 upon adoption of FASB Interpretation
No. 46R, “Consolidation of Variable Interest
Entities.” As a result, the Company reported junior
subordinated notes issued to capital trusts in lieu of trust
preferred capital securities. See Note 8 to the
Company’s financial statements under Item 8 of this
Form 10-K for more information. |
15
|
|
| ITEM 7. |
Management’s Discussion And Analysis Of Financial
Condition And Results Of Operation |
The following discussion and analysis provides information about
the financial condition and results of operations of the Company
for the years ended December 31, 2004, 2003 and 2002. 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
Form 10-K.
EXECUTIVE SUMMARY
The Company, through its wholly-owned bank subsidiary, operates
a single line of business encompassing a 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 among financial intermediaries is generally
expressed in terms of interest rates charged on loans and paid
on deposits, the variety of financial products and services
offered and the price of those products and services. The
Company offers a full range of banking products and services
such as demand, savings and time deposits, corporate treasury
management services, merchant credit card processing and
commercial and personal lending products. The Company also
maintains a full-service investment management and trust
department, and in 2003 formed an investment sales center to
execute investment transactions in U.S. Treasury, U.S.
Government agency, corporate and municipal securities and mutual
funds, primarily for commercial businesses, not-for-profit
organizations, governmental entities and high net worth
individuals and families. During the second quarter of 2005, the
Company’s subsidiary, FOBCM, will assume these investment
transaction activities.
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
relative to the amounts and costs of interest-bearing
liabilities, noninterest bearing liabilities and capital. Net
interest income is sensitive to changes in market rates of
interest and to the execution of the Company’s
asset/liability management strategy. The provision for loan
losses is affected by growth in and changes to the composition
of the loan portfolio, management’s assessment of the
quality and collectibility of the loan portfolio, loss
experience, as well as economic and market factors that impact
such matters.
Noninterest income consists primarily of services charges from
treasury management clients, merchant card processing fees,
investment management and trust fee income, retail and small
business fees, income from bank owned life insurance and covered
call options, and to a lesser extent, gains on mortgages sold,
securities dealer and annuity commissions and other ancillary
income. Noninterest expenses are heavily influenced by the
growth of the Company’s operations and branching structure
including offering competitive salaries and benefits, merchant
credit card interchange expense, advertising expense and any
necessary provision for loss on other real estate owned. The
Company’s primary growth strategy continues to emphasize
the expansion of branch locations in the Chicago metropolitan
area (and particularly the western suburbs of Chicago). The
Company opened three new branches in fiscal year 2003, which
added new deposits and increased noninterest expenses and has
announced three additional branches planned to open in 2005 and
one branch expected to open in early 2006. See “Branch
Expansion” for additional information.
The Company’s consolidated net income, earnings per share
and selected ratios for 2004, 2003 and 2002 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net income
|
|
$ |
19,072,000 |
|
|
$ |
18,435,000 |
|
|
$ |
10,501,000 |
|
|
Basic earnings per share
|
|
$ |
1.95 |
|
|
$ |
1.92 |
|
|
$ |
1.10 |
|
|
Diluted earnings per share
|
|
$ |
1.91 |
|
|
$ |
1.87 |
|
|
$ |
1.08 |
|
|
Return on average assets
|
|
|
.96 |
% |
|
|
1.11 |
% |
|
|
.71 |
% |
|
Return on average equity
|
|
|
15.21 |
% |
|
|
15.79 |
% |
|
|
10.03 |
% |
16
Set forth below are significant items that occurred during 2004
and some related 2003 discussion:
|
|
|
| |
• |
Assets at year-end grew to $2.083 billion, up 13% over 2003. |
| |
| |
• |
Equity increased to $133.8 million, up 11% over 2003. |
| |
| |
• |
Loans grew to a record $1.072 billion, up 17% over 2003. |
| |
| |
• |
Deposits were a record $1.715 billion, up 18% over 2003. |
| |
| |
• |
Cash dividends paid per share increased 38% over 2003. |
| |
| |
• |
FOBB share price increased 8% to $32.41 per share at year end. |
| |
| |
• |
Net income increased 3% in 2004. Net income in 2003 was up $7.9
million from 2002. The Company’s 2002 net income was
depressed due to a large loan loss from fraud on a construction
loan. See “Asset Quality”. |
| |
| |
• |
Net interest income increased $2.2 million. Volume of
average earning assets increased $327.1 million, average
investments rose $224.1 million and average loans rose
$100.1 million. |
| |
| |
• |
Net interest margin went down 47 basis points to 2.89%. Margin
compression was primarily due to a change in the mix of earning
assets and having a balance sheet that is liability sensitive,
lower prepayment penalties than in 2003, competitive pressures
on loan and deposit pricing and the flattening of the yield
curve. |
| |
| |
• |
Treasury management fees went down $1,102,000 primarily due to
the loss of one significant customer in June 2003. |
| |
| |
• |
Trust fees rose $481,000 due to a $115.8 million increase
in discretionary assets under management as compared to
December 31, 2003. |
| |
| |
• |
Gain on mortgages sold was $242,000, down $762,000 from 2003,
due to an overall mortgage market slowdown. |
| |
| |
• |
The sale of covered call options provided income of
$1.1 million, down slightly from 2003. |
| |
| |
• |
The provision for loan losses was $500,000, down from
$1.6 million in 2003, due to improved asset quality.
Nonperforming loans totaled $148,000 and the Management Watch
list (including commitments and excluding OREO) declined to
$259,000 at December 31, 2004, down from $9.2 million
at December 31, 2003. |
| |
| |
• |
Other Real Estate Owned (“OREO”) dropped to
$9.9 million at year-end 2004 as compared to $16.1 million
at year-end 2003. |
See “Results of Operations” for further explanation of
the Company’s 2004 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
17
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
|
|
|
Allowance for Loan Losses |
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, nonperforming loans and potential
problem loans and related commitments. Although the Management
Watch list includes the Company’s properties in OREO, these
assets are 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 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. Because the criteria for both the allocated and
unallocated portion 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.
18
The Company accounts for income tax expense by applying
statutory tax rates to federal and state taxable income. Federal
and state taxable income is calculated 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 judgments and estimates
regarding temporary differences in the recognition of income and
expenses for financial statement and income tax purposes.
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” and Note 9 to the Company’s financial
statements under 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 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. The effective rate paid for all funding sources is lower
than the rate paid on interest-bearing liabilities alone because
a significant portion of the Company’s funding is derived
from interest-free sources, primarily demand deposits and
shareholders’ equity.
19
The following table presents the average interest rate on each
major category of interest-earning assets and interest-bearing
liabilities for 2004, 2003, and 2002.
Average Balances and Effective Interest Rates
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
Interest | |
|
|
|
|
|
Interest | |
|
|
|
|
|
Interest | |
|
|
| |
|
Average | |
|
Income/ | |
|
Yield/ | |
|
Average | |
|
Income/ | |
|
Yield/ | |
|
Average | |
|
Income/ | |
|
Yield/ | |
| |
|
Balance | |
|
Expense | |
|
Rates | |
|
Balance | |
|
Expense | |
|
Rates | |
|
Balance | |
|
Expense | |
|
Rates | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fed funds sold and interest-bearing deposits with banks
|
|
$ |
48,622 |
|
|
$ |
691 |
|
|
|
1.42 |
% |
|
$ |
45,678 |
|
|
$ |
500 |
|
|
|
1.09 |
% |
|
$ |
60,755 |
|
|
$ |
1,001 |
|
|
|
1.65 |
% |
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Taxable securities
|
|
|
789,842 |
|
|
|
34,618 |
|
|
|
4.38 |
|
|
|
570,662 |
|
|
|
26,796 |
|
|
|
4.70 |
|
|
|
376,096 |
|
|
|
20,752 |
|
|
|
5.52 |
|
| |
Tax exempt
securities(1)
|
|
|
42,501 |
|
|
|
2,290 |
|
|
|
5.39 |
|
|
|
37,551 |
|
|
|
2,356 |
|
|
|
6.27 |
|
|
|
41,808 |
|
|
|
2,728 |
|
|
|
6.53 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment
securities(2)
|
|
|
832,343 |
|
|
|
36,908 |
|
|
|
4.43 |
|
|
|
608,213 |
|
|
|
29,152 |
|
|
|
4.79 |
|
|
|
417,904 |
|
|
|
23,480 |
|
|
|
5.62 |
|
|
Loans:(1)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Commercial(1)
|
|
|
95,176 |
|
|
|
4,228 |
|
|
|
4.44 |
|
|
|
88,386 |
|
|
|
4,666 |
|
|
|
5.28 |
|
|
|
96,093 |
|
|
|
6,222 |
|
|
|
6.47 |
|
| |
Syndicated
|
|
|
31,625 |
|
|
|
1,429 |
|
|
|
4.52 |
|
|
|
39,347 |
|
|
|
1,898 |
|
|
|
4.82 |
|
|
|
41,655 |
|
|
|
2,043 |
|
|
|
4.90 |
|
| |
Construction, land acquisition and development
|
|
|
62,946 |
|
|
|
3,748 |
|
|
|
5.95 |
|
|
|
56,084 |
|
|
|
3,579 |
|
|
|
6.38 |
|
|
|
95,777 |
|
|
|
5,609 |
|
|
|
5.86 |
|
| |
Commercial mortgage
|
|
|
244,400 |
|
|
|
15,726 |
|
|
|
6.43 |
|
|
|
227,233 |
|
|
|
16,030 |
|
|
|
7.05 |
|
|
|
227,188 |
|
|
|
16,139 |
|
|
|
7.10 |
|
| |
Residential mortgage
|
|
|
104,865 |
|
|
|
5,325 |
|
|
|
5.08 |
|
|
|
92,732 |
|
|
|
5,380 |
|
|
|
5.80 |
|
|
|
102,555 |
|
|
|
6,909 |
|
|
|
6.74 |
|
| |
Home equity
|
|
|
145,539 |
|
|
|
5,700 |
|
|
|
3.92 |
|
|
|
131,934 |
|
|
|
5,207 |
|
|
|
3.95 |
|
|
|
116,593 |
|
|
|
5,475 |
|
|
|
4.70 |
|
| |
Indirect vehicle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Auto
|
|
|
253,292 |
|
|
|
10,384 |
|
|
|
4.10 |
|
|
|
212,962 |
|
|
|
11,366 |
|
|
|
5.34 |
|
|
|
209,801 |
|
|
|
13,854 |
|
|
|
6.60 |
|
| |
|
Harley Davidson motorcycle
|
|
|
45,038 |
|
|
|
2,730 |
|
|
|
6.06 |
|
|
|
33,232 |
|
|
|
2,254 |
|
|
|
6.78 |
|
|
|
25,939 |
|
|
|
1,980 |
|
|
|
7.63 |
|
| |
Consumer
|
|
|
7,765 |
|
|
|
474 |
|
|
|
6.10 |
|
|
|
8,669 |
|
|
|
540 |
|
|
|
6.23 |
|
|
|
10,811 |
|
|
|
760 |
|
|
|
7.03 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of unearned discount
|
|
|
990,646 |
|
|
|
49,744 |
|
|
|
5.02 |
|
|
|
890,579 |
|
|
|
50,920 |
|
|
|
5.72 |
|
|
|
926,412 |
|
|
|
58,991 |
|
|
|
6.37 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets/ interest income
|
|
$ |
1,871,611 |
|
|
$ |
87,343 |
|
|
|
4.67 |
% |
|
$ |
1,544,470 |
|
|
$ |
80,572 |
|
|
|
5.22 |
% |
|
$ |
1,405,071 |
|
|
$ |
83,472 |
|
|
|
5.94 |
% |
|
Cash and due from banks
|
|
|
36,771 |
|
|
|
|
|
|
|
|
|
|
|
39,898 |
|
|
|
|
|
|
|
|
|
|
|
42,428 |
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
90,102 |
|
|
|
|
|
|
|
|
|
|
|
79,429 |
|
|
|
|
|
|
|
|
|
|
|
46,183 |
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(8,703 |
) |
|
|
|
|
|
|
|
|
|
|
(8,204 |
) |
|
|
|
|
|
|
|
|
|
|
(10,035 |
) |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
1,989,781 |
|
|
|
|
|
|
|
|
|
|
$ |
1,655,593 |
|
|
|
|
|
|
|
|
|
|
$ |
1,483,647 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Savings deposits and NOW accounts
|
|
$ |
281,964 |
|
|
$ |
3,149 |
|
|
|
1.12 |
% |
|
$ |
214,120 |
|
|
$ |
2,163 |
|
|
|
1.01 |
% |
|
$ |
144,650 |
|
|
$ |
1,710 |
|
|
|
1.18 |
% |
| |
Money market accounts
|
|
|
141,234 |
|
|
|
1,811 |
|
|
|
1.28 |
|
|
|
132,964 |
|
|
|
1,534 |
|
|
|
1.15 |
|
|
|
153,379 |
|
|
|
3,062 |
|
|
|
2.00 |
|
| |
Time deposits
|
|
|
928,822 |
|
|
|
21,167 |
|
|
|
2.28 |
|
|
|
732,738 |
|
|
|
17,899 |
|
|
|
2.44 |
|
|
|
654,877 |
|
|
|
22,380 |
|
|
|
3.42 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total interest-bearing deposits
|
|
|
1,352,020 |
|
|
|
26,127 |
|
|
|
1.93 |
% |
|
|
1,079,822 |
|
|
|
21,596 |
|
|
|
2.00 |
% |
|
|
952,906 |
|
|
|
27,152 |
|
|
|
2.85 |
% |
| |
Securities sold under agreements to repurchase and other
short-term borrowings
|
|
|
41,651 |
|
|
|
450 |
|
|
|
1.08 |
|
|
|
78,779 |
|
|
|
829 |
|
|
|
1.05 |
|
|
|
94,350 |
|
|
|
1,596 |
|
|
|
1.69 |
|
| |
FHLB of Chicago borrowings
|
|
|
161,940 |
|
|
|
5,197 |
|
|
|
3.21 |
|
|
|
99,679 |
|
|
|
5,051 |
|
|
|
5.07 |
|
|
|
91,241 |
|
|
|
5,390 |
|
|
|
5.91 |
|
| |
Junior subordinated notes issued to capital trusts
|
|
|
23,713 |
|
|
|
1,526 |
|
|
|
6.44 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Trust Preferred Capital Securities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18,178 |
|
|
|
1,228 |
|
|
|
6.76 |
|
|
|
12,214 |
|
|
|
981 |
|
|
|
8.03 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities/interest expense
|
|
$ |
1,579,324 |
|
|
$ |
33,300 |
|
|
|
2.11 |
% |
|
$ |
1,276,458 |
|
|
$ |
28,704 |
|
|
|
2.25 |
% |
|
$ |
1,150,711 |
|
|
$ |
35,119 |
|
|
|
3.05 |
% |
|
Noninterest-bearing demand deposits
|
|
|
271,259 |
|
|
|
|
|
|
|
|
|
|
|
246,525 |
|
|
|
|
|
|
|
|
|
|
|
216,100 |
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
13,797 |
|
|
|
|
|
|
|
|
|
|
|
15,846 |
|
|
|
|
|
|
|
|
|
|
|
12,130 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$ |
1,864,380 |
|
|
|
|
|
|
|
|
|
|
$ |
1,538,829 |
|
|
|
|
|
|
|
|
|
|
$ |
1,378,941 |
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
125,401 |
|
|
|
|
|
|
|
|
|
|
|
116,764 |
|
|
|
|
|
|
|
|
|
|
|
104,706 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
1,989,781 |
|
|
|
|
|
|
|
|
|
|
$ |
1,655,593 |
|
|
|
|
|
|
|
|
|
|
$ |
1,483,647 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest
spread(4)
|
|
|
|
|
|
$ |
54,043 |
|
|
|
2.56 |
% |
|
|
|
|
|
$ |
51,868 |
|
|
|
2.97 |
% |
|
|
|
|
|
$ |
48,353 |
|
|
|
2.89 |
% |
|
Net interest margin
(5)
|
|
|
|
|
|
|
|
|
|
|
2.89 |
% |
|
|
|
|
|
|
|
|
|
|
3.36 |
% |
|
|
|
|
|
|
|
|
|
|
3.44 |
% |
|
|
| (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 35% in 2004, 2003
and 2002. See the following table for reconciliation to GAAP. |
| (2) |
Investment securities are shown at their respective carrying
values. Based on the amortized cost, the average balance and
weighted-average tax equivalent yield of total investment
securities was $832,987 and 4.43% in 2004; $599,081 and 4.87% in
2003; and $409,278 and 5.75% in 2002. |
| (3) |
Total average nonaccrual loans of $252, $275 and $8,835 for the
years ended December 31, 2004, 2003 and 2002, respectively,
are included in the average balance. The majority of average
nonaccrual loans for 2002 were construction loans which
represented $8,794 of the total nonaccrual balance. The yield on
construction loans would have been 6.45% for the year ended
December 31, 2002 had nonaccrual loans been excluded. |
| (4) |
Total yield on average earning assets, less total rate paid on
average interest-bearing liabilities. |
| (5) |
Net interest income on a tax equivalent basis divided by average
earning assets. |
20
The following table indicates the reconciliation of the GAAP
interest income to the tax equivalent interest income as
reported in the average balance sheet for 2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, | |
|
Years ended December 31, | |
| |
|
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
| |
|
Tax-exempt securities | |
|
Commercial loans | |
|
GAAP Income
|
|
$ |
1,711 |
|
|
$ |
1,787 |
|
|
$ |
1,907 |
|
|
$ |
4,175 |
|
|
$ |
4,598 |
|
|
$ |
6,138 |
|
|
Tax equivalent adjustment
|
|
$ |
579 |
|
|
$ |
569 |
|
|
$ |
821 |
|
|
$ |
53 |
|
|
$ |
68 |
|
|
$ |
84 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax equivalent interest income
|
|
$ |
2,290 |
|
|
$ |
2,356 |
|
|
$ |
2,728 |
|
|
$ |
4,228 |
|
|
$ |
4,666 |
|
|
$ |
6,222 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, on a tax equivalent basis, increased
$2,175,000, or 4%, as compared to 2003. The increase is
primarily attributable to a 21% increase in average earning
assets partially offset by an 47 basis point decrease in
the net interest margin to 2.89% for 2004 from 3.36% for 2003.
The Company anticipates average earning assets will continue to
rise in 2005; however, continued margin pressure is also
expected given the flattening of the yield curve and competitive
pressures on loan and deposit pricing.
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 55 basis
points to 4.67% while the cost of interest-bearing liabilities
decreased 14 basis points to 2.11% for 2004. The Federal
Reserve reduced the Fed funds rate by 25 basis points in
June 2003. The Fed funds rate stayed constant until June 2004,
at which time the Federal Reserve began raising rates gradually
– doing so five times for an aggregate increase of
125 basis points by December 2004. Margin compression was
partially the result of being liability sensitive (liabilities
reprice more quickly than assets) as interest rates rose,
competitive pressures on loan and deposit pricing and the
flattening of the yield curve. |
| |
| |
• |
The decrease in the yield on average earning assets is due
primarily to growth in lower yielding asset categories
(investments and indirect auto loans). The investment portfolio
yield was compressed partially as a result of the overall
shortening of the contractual maturity of the portfolio to
6.3 years at December 31, 2004 from 7.8 years at
December 31, 2003 and a reduction in accretion income. In
addition, the Company experienced an overall decrease in loan
fees of $685,000 (representing a seven basis point decline
in the yield on average earning assets) in 2004 as compared to
2003 primarily due to a decrease in prepayment penalties and
contingent fee arrangements. Although loan fees are amortized to
income over the loan period as a normal part of the business,
the additional fees associated with the prepayment of loans are
less predictable and, during periods of higher prepayment
activity, can result in a spike in earnings since these fees are
recorded in income when received. |
| |
| |
• |
The decrease in the cost of average interest-bearing liabilities
is due primarily to growth in public fund time deposits which
typically have a lower cost and shorter terms than promotional
rate retail time deposits. |
VOLUME
|
|
|
| |
• |
Total average earning assets increased $327.1 million, or
21%, as compared to 2003. The Company’s average securities
portfolio increased by $224.1 million, or 37%, and consists
of increases in U.S. Government agency securities
($218.8 million), corporate and other securities
($13.0 million), and state and municipal obligations
($4.6 million), offset by a decrease in U.S. Treasury
securities ($12.2 million). See “Investment
Securities” for further analysis. |
| |
| |
• |
Average loans for 2004 increased $100.1 million, or 11%, as
compared to 2003. The increase primarily consists of increases
in indirect vehicle loans ($52.1 million), commercial
mortgage loans ($17.2 mil- |
21
|
|
|
| |
|
lion), home equity loans ($13.6 million), residential
mortgage loans ($12.1 million), and construction loans
($6.9 million). See “Loans” for further analysis. |
| |
| |
• |
Average interest-bearing liabilities increased
$302.9 million, or 24%, as compared to 2003. Average
interest-bearing deposits increased $272.2 million
primarily due to growth in time deposits ($196.1 million),
savings and NOW accounts ($67.8 million) and money market
accounts ($8.3 million). Time deposits were augmented by a
$107.5 million average increase in public funds, while
savings and NOW growth was spurred by the promotion of higher
rate products. The overall increase in average deposits includes
an increase of $78.4 million from the three branches opened
in 2003. |
| |
| |
• |
Average securities sold under agreements to repurchase and other
short-term borrowings decreased $37.1 million due primarily
to a $39.2 million average decrease in commercial and term
repurchase agreements. |
| |
| |
• |
Average Federal Home Loan Bank (“FHLB”) of Chicago
borrowings increased $62.3 million due primarily to the
advance of an additional $75 million floating rate
borrowing on December 30, 2003 as part of a balance sheet
arbitrage initiated to lock in a favorable spread. See
“Investment Securities” for further analysis. |
| |
| |
• |
As a result of the deconsolidation of the three statutory trust
subsidiaries, the Company reported an average of
$23.713 million in junior subordinated notes issued to
capital trusts for 2004 in lieu of the $18.178 million of
average trust preferred capital securities recorded for 2003.
The average increase in the reported liability of
$5.5 million is due primarily to the $5 million
participation in a pooled trust preferred offering in the fourth
quarter of 2003 and the $713,000 of the Company’s equity in
the unconsolidated subsidiaries which is now included in Other
Assets. See Notes 1 and 8 to the Company’s financial
statements under Item 8 of this Form 10-K. |
| |
| |
• |
Average demand deposits increased $24.7 million due
primarily to new customer volume and increased balances from
existing treasury management customers. |
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 was primarily invested in
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 falling 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. |
22
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
consisted 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). The increase in corporate and
other securities was 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 was 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 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
Countryside office (opened in January 2003), $5.4 million
from the Graue Mill office (opened in May 2003), and
$2.5 million from the 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 60 W. Erie,
carried in OREO (“60 W. Erie”). 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 the Company’s financial
statements under Item 8 of this Form 10-K for more
information. |
| |
| |
• |
Average demand deposits increased $30.4 million due
primarily to new customer volume. |
23
The following table presents a summary analysis of changes in
interest income and interest expense for 2004 as compared to
2003 and 2003 as compared to 2002. Interest income increased in
2004 primarily due to the increase in the average volume of
loans and securities, partially offset by the overall
55 basis point decrease in the yield earned on interest
earning assets. Interest expense increased primarily due to the
increase in the average volume of interest-bearing liabilities
(primarily time deposits and FHLB of Chicago borrowings),
partially offset by the overall decrease of 14 basis points
on the cost of interest-bearing liabilities.
Interest income decreased in 2003 primarily due to the overall
72 basis point decrease in the yield earned on interest
earning assets and the decrease in the average volume of loans,
partially offset by an increase in the average volume of
securities. Interest expense decreased primarily due to the
overall decrease of 80 basis points on the cost of
interest-bearing liabilities, partially offset by increases in
the average volume of interest-bearing deposits, FHLB of Chicago
borrowings and proceeds from the TRUPS offering.
Analysis of Net Interest Income Changes
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 Over 2003 | |
|
2003 Over 2002 | |
| |
|
| |
|
| |
| |
|
Volume(1) | |
|
Rate(1) | |
|
Total | |
|
Volume(1) | |
|
Rate(1) | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Increase (decrease) in interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fed funds sold and interest-bearing deposits with banks
|
|
$ |
41 |
|
|
$ |
150 |
|
|
$ |
191 |
|
|
$ |
(213 |
) |
|
$ |
(288 |
) |
|
$ |
(501 |
) |
| |
Taxable securities
|
|
|
9,692 |
|
|
|
(1,870 |
) |
|
|
7,822 |
|
|
|
9,447 |
|
|
|
(3,403 |
) |
|
|
6,044 |
|
| |
Tax exempt
securities(2)
|
|
|
293 |
|
|
|
(359 |
) |
|
|
(66 |
) |
|
|
(270 |
) |
|
|
(102 |
) |
|
|
(372 |
) |
| |
Loans, net of unearned
discount(2,3)
|
|
|
5,428 |
|
|
|
(6,604 |
) |
|
|
(1,176 |
) |
|
|
(2,218 |
) |
|
|
(5,853 |
) |
|
|
(8,071 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$ |
15,454 |
|
|
$ |
(8,683 |
) |
|
$ |
6,771 |
|
|
$ |
6,746 |
|
|
$ |
(9,646 |
) |
|
$ |
(2,900 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Savings deposits and NOW accounts
|
|
$ |
740 |
|
|
$ |
246 |
|
|
$ |
986 |
|
|
$ |
732 |
|
|
$ |
(279 |
) |
|
$ |
453 |
|
| |
Money market accounts
|
|
|
100 |
|
|
|
177 |
|
|
|
277 |
|
|
|
(366 |
) |
|
|
(1,162 |
) |
|
|
(1,528 |
) |
| |
Time deposits
|
|
|
4,538 |
|
|
|
(1,270 |
) |
|
|
3,268 |
|
|
|
2,437 |
|
|
|
(6,918 |
) |
|
|
(4,481 |
) |
| |
Securities sold under agreements to repurchase and other
short-term borrowings
|
|
|
(400 |
) |
|
|
21 |
|
|
|
(379 |
) |
|
|
(233 |
) |
|
|
(534 |
) |
|
|
(767 |
) |
| |
FHLB of Chicago borrowings
|
|
|
2,440 |
|
|
|
(2,294 |
) |
|
|
146 |
|
|
|
470 |
|
|
|
(809 |
) |
|
|
(339 |
) |
| |
Junior subordinated notes issued to capital
trusts(4)
|
|
|
359 |
|
|
|
(61 |
) |
|
|
298 |
|
|
|
422 |
|
|
|
(175 |
) |
|
|
247 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$ |
7,777 |
|
|
$ |
(3,181 |
) |
|
$ |
4,596 |
|
|
$ |
3,462 |
|
|
$ |
(9,877 |
) |
|
$ |
(6,415 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net interest income
|
|
$ |
7,677 |
|
|
$ |
(5,502 |
) |
|
$ |
2,175 |
|
|
$ |
3,284 |
|
|
$ |
231 |
|
|
$ |
3,515 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
The change in interest due to both rate and volume has been
allocated proportionately. |
| (2) |
Tax equivalent basis. Tax exempt loans and investment securities
include the effects of tax equivalent adjustments using a tax
rate of 35% in 2004, 2003 and 2002. |
| (3) |
Includes nonaccrual loans. |
| (4) |
Shows junior subordinated notes issued to capital trusts at
December 31, 2004 compared to Trust Preferred Capital
Securities at December 31, 2003 due to deconsolidation of
statutory trusts on January 1, 2004. See Notes 1 and 8 to
the Company’s financial statements under Item 8 of
this Form 10-K for more information. |
Provision for Loan Losses
The Provision for Loan Losses was $500,000 in 2004, a decrease
of $1,100,000 as compared to 2003, primarily due to a lower
level of charge-offs and improved asset quality, including a
reduction in Management Watch list loans (including commitments
and excluding OREO) to $259,000 at December 31, 2004 from
$9.2 million at year end 2003. The provision decreased
$13,050,000 in 2003 as compared to 2002 primarily due
24
to special provisions in 2002 totaling $12,050,000 related to
the loan fraud on 60 W. Erie. The remaining decrease
in 2003 is primarily related to the reduction in Management
Watch list loans.
See “Allowance for Loan Losses” and “Asset
Quality” for further analysis.
Summary of Other Income
The following table summarizes significant components of Other
Income and percentage changes from year to year:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
% Change | |
| |
|
|
|
|
|
|
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
’04-’03 | |
|
’03-’02 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
|
|
|
|
Service charges on deposit accounts—
Treasury management
|
|
$ |
4,499 |
|
|
$ |
5,601 |
|
|
$ |
6,162 |
|
|
|
(20 |
)% |
|
|
(9 |
)% |
| |
Retail and small business
|
|
|
1,272 |
|
|
|
1,259 |
|
|
|
1,214 |
|
|
|
1 |
|
|
|
4 |
|
|
Investment management and trust fees
|
|
|
2,621 |
|
|
|
2,140 |
|
|
|
1,701 |
|
|
|
22 |
|
|
|
26 |
|
|
Merchant credit card processing fees
|
|
|
5,978 |
|
|
|
4,849 |
|
|
|
4,813 |
|
|
|
23 |
|
|
|
1 |
|
|
Gain on mortgages sold, net
|
|
|
242 |
|
|
|
1,004 |
|
|
|
814 |
|
|
|
(76 |
) |
|
|
23 |
|
|
Income from bank owned life insurance
|
|
|
847 |
|
|
|
829 |
|
|
|
184 |
|
|
|
2 |
|
|
|
351 |
|
|
Income from sale of covered call options
|
|
|
1,110 |
|
|
|
1,167 |
|
|
|
395 |
|
|
|
(5 |
) |
|
|
195 |
|
|
Income from revenue sharing agreement
|
|
|
— |
|
|
|
— |
|
|
|
450 |
|
|
|
— |
|
|
|
— |
|
|
Securities dealer income
|
|
|
224 |
|
|
|
64 |
|
|
|
— |
|
|
|
250 |
|
|
|
— |
|
|
Other operating income
|
|
|
1,398 |
|
|
|
1,305 |
|
|
|
1,403 |
|
|
|
7 |
|
|
|
(7 |
) |
|
Investment securities gains, net
|
|
|
341 |
|
|
|
217 |
|
|
|
314 |
|
|
|
57 |
|
|
|
(31 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
18,532 |
|
|
$ |
18,435 |
|
|
$ |
17,450 |
|
|
|
1 |
% |
|
|
6 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income increased $97,000, or 1%. Service charges on
deposit accounts paid in cash from treasury management clients
decreased $1,102,000 due primarily to the loss of one
significant customer in June 2003, higher demand deposit
balances and higher earnings credit rates being paid on deposit
account balances. Cash fees from this customer totaled $3,000
and $952,000 for the years ended December 31, 2004 and
2003, respectively. Excluding this significant customer, total
treasury management fees, both cash fees and fees offset by
earnings credits on deposit balances, decreased 2% as compared
to 2003 due primarily to less revenue from existing customers
and lost business. The industry shift from paper based payments
to lower priced electronic payments continues to put downward
pressure on gross treasury management revenues. Treasury
management clients have the option of paying for services either
by maintaining noninterest-bearing deposit balances, paying in
cash, or a combination of deposit balances and cash. The
treasury management fees included in the financial statements
represent only the cash fees paid by treasury management
clients. As interest rates rise (as they did late in 2004) so
does the value of earnings credits assigned to deposit balances.
As a result, deposit balances cover more service charges and
cash fees tend to decline in a rising rate environment.
Investment management and trust fees increased $481,000
primarily due to an increase in total trust assets resulting
from strong business development results and high client
retention rates. Asset growth was also favorably impacted by
market appreciation. Discretionary assets under management
climbed to $751.0 million at December 31, 2004, up
from $635.2 million at December 31, 2003. Total trust
assets under administration rose to $944.3 million at
December 31, 2004, up from $786.5 million at
December 31, 2003.
Merchant credit card processing fees increased $1,129,000
primarily due to a $57.7 million increase in sales volume
(primarily new customers) partially offset by price concessions
that resulted from competitive pressures. The number of merchant
outlets at December 31, 2004 increased to 566 as compared
to 429 at
25
December 31, 2003. Merchant credit card interchange
expense, included in Other Expenses, increased $1,025,000 as
compared to 2003.
Gain on mortgages sold with servicing released decreased
$762,000 as compared to 2003. This decrease was due primarily to
an overall market slowdown caused by higher interest rates and
the Company selling a smaller dollar amount of mortgage
originations. The Company originated a total of
$56.8 million in mortgage loans in 2004, of which
$16.6 million were sold. During 2003, the Company
originated $144.1 million in mortgage loans, of which
$82.1 million were sold. Gain on mortgages sold is shown
net of applicable costs of $40,000 in 2004 and $477,000 in 2003.
The Company anticipates growth during 2005 in income related to
mortgages due to significant planned advertising for the
Company’s new “guaranteed best rate” mortgage and
home equity products.
Income from bank owned life insurance (“BOLI”)
increased $18,000 over 2003 primarily from the purchases of an
additional $5 million in August 2003 and $3 million in
December 2004, partially offset by lower yields. Income earned
from BOLI is currently exempt from Federal income tax.
Income from the sale of covered call options decreased $57,000.
The Company periodically sells options to securities dealers for
the dealers’ right to purchase certain U.S. Treasury or
U.S. Government agency securities held within the investment
portfolio. These transactions are designed primarily as yield
enhancements to increase the total return associated with
holding the securities as earning assets. There were no
outstanding call options at December 31, 2004. Selling
covered call options are most attractive in a volatile rate
environment and continued income from this source is dependent
on market conditions.
Securities dealer income increased $160,000 as compared to 2003
due primarily to a full year of operation of the investment
sales center, which was formed in May 2003. This center has
continued to grow since its inception by focusing on selling
fixed income securities and mutual funds to commercial
businesses, not-for-profit organizations, governmental entities
and high net worth families. In January 2005, the Company
received approval from the NASD to operate its new subsidiary,
First Oak Brook Capital Markets, Inc. (“FOBCM”), as a
broker/dealer member of the NASD. During the second quarter of
2005, FOBCM will assume the current securities transaction
activities of the investment sales center and also will be able
to engage in expanded securities trading and underwriting
activities.
Other income increased $93,000 as compared to 2003. Late in
2003, the Company began training and licensing its retail
bankers to sell insured annuities which contributed $154,000 to
income in 2004. This increase was partially offset by a decrease
in mutual fund sweep fees.
The Company recorded net investment securities gains of $341,000
in 2004, compared to net gains of $217,000 in 2003. The net
gains in 2004 were recorded primarily on sales of
$155.1 million in U.S. Government agency securities,
$59.2 million in U.S. Treasury securities,
$20.0 million in FHLB of Chicago stock, and
$3.9 million in corporate and other securities. The net
gains in 2003 were recorded on sales of $88.6 million in
U.S. Government agency securities, $45.2 million in U.S.
Treasury securities and $2.7 million in corporate and other
securities. As market opportunities present themselves, the
Company periodically sells securities, as appropriate, to
reposition its investment portfolio in an effort to improve
overall yield or adjust the portfolio duration. Gains or losses
from investment sales are considered non-recurring by the
Company’s management.
2003 versus 2002
Total Other Income increased $985,000, or 6%. Service charges on
deposit accounts from treasury management clients decreased
$561,000 due primarily to the loss of one significant customer
whose contract with the Bank expired on June 30, 2003 and
was not renewed. Revenue from this customer, consisting
primarily of cash fees, totaled $952,000 and $1,427,000 for the
years ended December 31, 2003 and 2002, respectively. Total
treasury management service charges, both cash fees and balance
equivalents, decreased 9% as compared to 2002. Excluding the
significant customer, cash fees were down 2% as compared to 2002
and total service charges were down 4% as compared to 2002 due
to lost revenue from departing customers. As interest rates
decrease so does the value of earnings credits assigned to
deposit balances. Therefore, in a low
26
interest rate environment (like that experienced during 2003),
cash fees tend to rise; whereas, in a higher interest rate
environment, deposit balances cover more of the service charges
and cash fees tend to decline. Treasury management clients have
the option of paying for 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 only the cash fees
paid by treasury management customers.
Investment management and trust fees increased $439,000
primarily due to an increase in total trust assets resulting
from strong business development and high client retention
rates. In addition, asset growth was favorably impacted by
market appreciation. Discretionary assets under management
climbed to $635.2 million at December 31, 2003, up
from $485.1 million at December 31, 2002. Total trust
assets under administration rose to $786.5 million at
December 31, 2003, up from $687.6 million at
December 31, 2002.
Merchant credit card processing fees increased $36,000 primarily
due to a $6.4 million increase in sales volume partially
offset by price decreases resulting from competitive pressures.
The number of merchant outlets at December 31, 2003 and
2002 was 429. Merchant credit card interchange expense (in Other
Expense section) increased $82,000 as compared to 2002.
Gain on mortgages sold with servicing released increased
$190,000 as compared to 2002. As a result of lower interest
rates, the residential mortgage loan refinance market was strong
through much of 2003, dropping off significantly in the fourth
quarter of 2003. The Company originated a total of
$144.1 million in mortgage loans in 2003, of which
$82.1 million were sold. During 2002, the Company
originated $132.0 million in mortgage loans, of which
$80.3 million were sold. Although the dollar value of loans
sold increased only marginally, the Company capitalized on the
falling interest rate environment, resulting in approximately
26 basis points more gain per dollar sold. Fee income is
shown net of applicable costs of $477,000 in 2003 and $466,000
in 2002.
Income from bank owned life insurance (“BOLI”)
increased $645,000 over 2002 primarily from the purchase of
$15 million of BOLI late in 2002 and the purchase of an
additional $5 million in August 2003.
Income from the sale of covered call options increased $772,000.
The Company periodically sells options to securities dealers for
the dealers’ right to purchase certain U.S. Treasury or
U.S. Government agency securities held within the investment
portfolio. These transactions are designed primarily as yield
enhancements to increase the total return associated with
holding the securities as earning assets. There were no
outstanding call options at December 31, 2003.
Income from the revenue sharing agreement arising from the sale
of the credit card portfolio in 1997 decreased $450,000. Under
the agreement, the Company shared in the revenue from the sold
portfolio for five years ending June 2002. Since the contractual
term had expired, no income was recorded in 2003.
The Company recorded net investment securities gains of $217,000
in 2003, compared to gains of $314,000 in 2002. The net gains in
2003 were recorded on sales of $88.6 million in U.S.
Government agency securities, $45.2 million in U.S.
Treasury securities and $2.7 million in corporate and other
securities. The net gains in 2002 were from the sales of
$50.3 million in U.S. Government agency securities and
$2.6 million in corporate and other securities.
27
Summary of Other Expenses
The following table summarizes significant components of Other
Expenses and percentage changes from year to year:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
% Change | |
| |
|
|
|
|
|
|
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
’04-’03 | |
|
’03-’02 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
|
|
|
|
Salaries and employee benefits
|
|
$ |
23,959 |
|
|
$ |
23,346 |
|
|
$ |
19,610 |
|
|
|
3 |
% |
|
|
19 |
% |
|
Occupancy expense
|
|
|
3,389 |
|
|
|
2,893 |
|
|
|
2,188 |
|
|
|
17 |
|
|
|
32 |
|
|
Equipment expense
|
|
|
2,100 |
|
|
|
1,979 |
|
|
|
1,870 |
|
|
|
6 |
|
|
|
6 |
|
|
Data processing
|
|
|
1,884 |
|
|
|
1,828 |
|
|
|
1,727 |
|
|
|
3 |
|
|
|
6 |
|
|
Professional fees
|
|
|
931 |
|
|
|
1,309 |
|
|
|
1,766 |
|
|
|
(29 |
) |
|
|
(26 |
) |
|
Postage, stationery and supplies
|
|
|
1,043 |
|
|
|
1,132 |
|
|
|
1,116 |
|
|
|
(8 |
) |
|
|
1 |
|
|
Advertising and business development
|
|
|
2,102 |
|
|
|
1,778 |
|
|
|
1,641 |
|
|
|
18 |
|
|
|
8 |
|
|
Merchant credit card interchange expense
|
|
|
4,824 |
|
|
|
3,799 |
|
|
|
3,717 |
|
|
|
27 |
|
|
|
2 |
|
|
Provision for other real estate owned
|
|
|
1,217 |
|
|
|
1,415 |
|
|
|
— |
|
|
|
(14 |
) |
|
|
— |
|
|
FDIC assessment
|
|
|
224 |
|
|
|
201 |
|
|
|
189 |
|
|
|
11 |
|
|
|
6 |
|
|
Other operating expenses
|
|
|
2,059 |
|
|
|
1,823 |
|
|
|
1,917 |
|
|
|
13 |
|
|
|
(5 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
43,732 |
|
|
$ |
41,503 |
|
|
$ |
35,741 |
|
|
|
5 |
% |
|
|
16 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Operating expenses as a percentage of average assets
|
|
|
2.2 |
% |
|
|
2.5 |
% |
|
|
2.4 |
% |
|
|
|
|
|
|
|
|
| |
Net overhead expenses as a percentage of average earning assets
|
|
|
1.4 |
|
|
|
1.5 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
| |
Efficiency ratio
|
|
|
60.8 |
|
|
|
59.6 |
|
|
|
55.1 |
|
|
|
|
|
|
|
|
|
2004 versus 2003
Total Other Expenses increased $2,229,000, or 5%. Salaries and
employee benefits increased $613,000 primarily due to higher
compensation costs and increased costs of employee benefits. The
average number of full-time equivalents decreased to 346 for
2004 from 356 for 2003 which was primarily the result of
reductions made late in 2003 to improve overall efficiency.
Although the number of employees decreased, the Company has
hired experienced senior lenders to grow the commercial and
commercial real estate lending areas. The Company expects to
continue to add experienced commercial lenders and retail
banking staff for the three new branches expected to open in
2005. In addition, upon the adoption of SFAS No. 123R in
July 2005, the Company will be required to recognize
compensation expense for both the Incentive Compensation and
Employee Stock Purchase Plans. See Note 1 to the
Company’s financial statements under Item 8 of this
Form 10-K for more information.
The combined expense for occupancy and equipment increased
$617,000 in 2004 over 2003, due primarily to a full year of
operating costs associated with the opening of the Graue Mill
branch in May 2003 and the St. Charles branch in October 2003.
In addition, the lease for one of the tenants of the
Company’s Oak Brook headquarters expired in April 2003 and
the Company and the Bank renovated and expanded into this space
in the fourth quarter of 2003. The Company expects a continued
increase in this expense in 2005 due to new branch expansion.
Professional fees decreased $378,000 due primarily to a
reduction in legal and other professional fees associated with
60 W. Erie and the reimbursement of legal fees in 2004 related
to a fully recovered problem credit. Decreased legal costs were
partially offset by increased audit and accounting fees of
$167,000 associated with compliance required by Section 404
of the Sarbanes-Oxley Act of 2002. The Company anticipates the
higher fees incurred for corporate governance and audit to
continue into 2005.
28
Advertising and business development expenses increased
$324,000. While direct advertising expense increased $25,000,
the remaining increase was due primarily to expenses associated
with individual sales and promotion efforts. In addition to new
branch promotions, the Company is introducing new
“guaranteed best rate” mortgage and home equity
products in 2005 and expects increased advertising expenses
related to rolling out the new promotion.
Merchant credit card interchange expense increased $1,025,000
due primarily to increased sales volume and higher interchange
rates. Merchant credit card processing fees, included in Other
Income, rose $1,129,000 in 2004.
The provision for OREO decreased $198,000. The Company evaluates
the properties in OREO quarterly for impairment and records a
valuation adjustment as deemed necessary. See “Asset
Quality” for more information.
Other operating expense increased $236,000 due primarily to
increased insurance costs and costs associated with terminating
the branch expansion previously planned for Yorkville, Illinois.
2003 versus 2002
Total Other Expenses increased $5,762,000, or 16%. Salaries and
employee benefits increased $3,736,000 primarily due to normal
salary increases, higher performance-related compensation and
the average number of full-time equivalents increasing to 356
for 2003 from 332 for 2002. The increase in full-time
equivalents resulted primarily from additional staff for the
three new branches and increased calling officers.
The combined expense for occupancy and equipment increased
$814,000 in 2003 over 2002, due primarily to costs associated
with the opening of the Countryside branch in January 2003, the
Graue Mill branch in May 2003, and the St. Charles branch in
October 2003. In addition, the lease for one of the tenants of
the Company’s Oak Brook headquarters expired in April 2003.
The Bank renovated and expanded into this space in the fourth
quarter of 2003.
Data processing fees increased $101,000 due partially to an
increase in fees paid to the main software provider. Until April
2003, this provider was on a long term contract permitting only
limited inflationary increases. In addition, trust processing
fees increased due primarily to an increase in the volume of
assets under administration.
Professional fees decreased $457,000 due primarily to a
reduction in legal and other professional fees associated with
60 W. Erie. Total professional fees related to this property
were $265,000 in 2003 compared to $687,000 in 2002. The Company
continued to incur additional professional fees for corporate
governance in 2003.
Advertising and business development increased $137,000 due
primarily to general marketing and promoting the opening of
three new branches.
Merchant credit card interchange expense increased $82,000 due
primarily to increased sales volume and increased interchange
rates. Merchant credit card processing fees (in Other Income
section) rose $36,000 in 2003.
The provision for OREO was $1,415,000 due to valuation
adjustments on 60 W. Erie (See “Asset Quality”).
Other operating expense decreased $94,000 due primarily to costs
of $423,000 incurred in 2002 related to the loan fraud on 60 W.
Erie. This decrease was partially offset by increased insurance
costs of $231,000. The Company’s Executive Risk policies
(directors and officers, fidelity bond and fiduciary) all had
three year terms that expired in 2002. In 2003, increased limits
and a hardened insurance market led to a significant premium
increase at renewal. In addition to the increase in the
Executive Risk policies, branch expansion and a higher employee
count led to increases in property and workers compensation
coverages, respectively.
29
Income Tax Expense
Income taxes for 2004 totaled $8,639,000 as compared to
$8,128,000 for 2003 and $4,006,000 for 2002. When measured as a
percentage of income before income taxes, the Company’s
effective tax rate was 31.2% for 2004, 30.6% for 2003 and 27.6%
for 2002. Effective tax rates are lower than statutory rates due
primarily to the investment in tax exempt municipal bonds and
the increase in the cash surrender value of bank owned life
insurance (“BOLI”), both of which are not taxable for
Federal income tax purposes. The Company’s provision for
income taxes includes Federal income tax expense of 35% applied
to taxable income in 2004, 2003 and 2002. The Company had no
state tax provision recorded in 2004 and 2003 due primarily to
significant income from state tax exempt investment securities
(U.S. Treasury and U.S. Government agency securities) and, to a
lesser extent, tax planning initiatives. The Company had no
state tax provision recorded in 2002 due to significant income
from state tax exempt securities and the lower pre-tax earnings.
A state net operating loss carryforward was produced in 2004,
2003 and 2002 and totaled $18.9 million at
December 31, 2004.
The accounting policies underlying the recognition of income
taxes in the balance sheets and statements of income are
included in the section titled “Application of Critical
Accounting Policies” in Item 7 and Notes 1
and 9 to the Company’s financial statements under
Item 8 of this Form 10-K. In accordance with such
policies, the Company records income tax expense
(benefits) in accordance with Financial Accounting
Standards Board Statement No. 109, Accounting for Income
Taxes (“SFAS 109”). Pursuant to these rules, the
Company recognizes deferred tax assets and liabilities based on
temporary differences in the recognition of income and expenses
for financial statement and income tax purposes. Such
differences are measured using the enacted tax rates and laws
that are applicable to periods in which the differences are
expected to affect taxable income. A net deferred tax asset
totaling $1,272,000 is recorded in the accompanying Consolidated
Balance Sheet at December 31, 2004.
Under FAS 109, deferred tax assets must be reduced by a
valuation allowance if it is more likely than not that some
portion or all of the deferred tax asset will not be realized.
In assessing whether a valuation allowance is required, the
Company considers the ability to realize the asset through
carryback to taxable income in prior years, the future reversal
of existing taxable temporary differences, and future taxable
income and tax planning strategies. Based on this assessment, a
valuation allowance of $896,000 is required on the state net
operating loss carryforward as disclosed in Note 9 to the
Company’s financial statements under Item 8 of this
Form 10-K.
FINANCIAL CONDITION
Liquidity
Effective management of balance sheet liquidity is necessary to
fund growth in earning assets, to meet maturing obligations and
depositors’ withdrawal requirements, to pay
shareholders’ dividends, and to purchase treasury stock
under stock repurchase programs.
The Company has numerous sources of liquidity including readily
marketable investment securities, shorter-term loans within the
loan portfolio, principal and interest cash flows from
investments and loans, the ability to attract retail and public
fund time deposits and to purchase brokered time deposits and
access to various borrowing arrangements.
Available borrowing arrangements are summarized as follows:
The Bank
|
|
|
| |
• |
Fed funds lines aggregating $225 million with seven
correspondent banks, subject to continued good financial
standing of the Bank. As of December 31, 2004, all
$225 million was available for use under these lines. |
| |
| |
• |
Reverse repurchase agreement lines aggregating $400 million
with four brokerage firms subject to the pledge of specific
collateral and continued good financial standing of the Bank. As
of December 31, 2004, all $400 million was available
for use under these lines, subject to the availability of
collateral. |
30
|
|
|
| |
|
An investment security is pledged towards a reverse repurchase
agreement at the time the Bank enters into such agreement. |
| |
| |
• |
Advances from the FHLB of Chicago subject to the pledge of
specific collateral and ownership of sufficient FHLB of Chicago
stock. As of December 31, 2004, advances totaled
$161.4 million and approximately $8.7 million remained
available to the Bank under the FHLB of Chicago agreements
without the pledge of additional collateral. The Bank has
pledged substantially all residential mortgage loans and
specifically listed multi-family mortgage loans and agency
securities towards the advances. Additional advances can be
obtained subject to the availability of collateral. |
| |
| |
• |
The Bank has a borrowing line of approximately
$206.2 million at the discount window of the Federal
Reserve Bank, subject to the availability of collateral. The
Bank has pledged substantially all construction loans and the
majority of commercial mortgage loans against this line. The
line was unused at December 31, 2004. |
As of December 31, 2004, the Bank has investment securities
totaling approximately $88.6 million available to pledge as
collateral towards reverse repurchase agreements or FHLB of
Chicago advances.
Parent Company
|
|
|
| |
• |
The Company has cash, short-term investments and other
marketable securities totaling $12.1 million at
December 31, 2004. |
| |
| |
• |
The Company has an unsecured revolving credit arrangement for
$15 million. The line was unused at December 31, 2004.
The line was renewed through April 1, 2005 and is
anticipated to be renewed annually. |
Interest Rate Sensitivity
The business of the Company and the composition of its balance
sheet consist 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, such as the Federal Reserve Bank. In addition,
since the Company’s primary source of interest-bearing
liabilities are customer deposits, the Company’s ability to
manage the types and terms of such deposits may be somewhat
limited by customer preferences and local competition in the
market areas in which the Company operates.
The Company manages its overall interest rate sensitivity
through various measurement techniques including rate shock
analysis. In addition, as part of the risk management process,
asset and 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 plus or minus
200 basis points. However, as a result of interest rate levels
at December 31, 2004 and 2003, the Company assumed rates
will not decline 200 basis points. As such, the scale shown
below reflects a more reasonable plus or minus 25 and
100 basis points in addition to a plus 200 basis point
rate shock. At December 31, 2004 and 2003, the Company was
within policy objectives based on its models.
31
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
| |
|
| |
| |
|
-100 bp | |
|
-25 bp | |
|
+25 bp | |
|
+100 bp | |
|
+200 bp | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Annual net interest income change from an immediate change in
rates
|
|
$ |
13 |
|
|
$ |
(80 |
) |
|
$ |
(57 |
) |
|
$ |
(840 |
) |
|
$ |
(1,922 |
) |
|
Percent change
|
|
|
— |
% |
|
|
(.2 |
)% |
|
|
(.1 |
)% |
|
|
(1.7 |
)% |
|
|
(3.9 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2003 | |
| |
|
| |
| |
|
-100 bp | |
|
-25 bp | |
|
+25 bp | |
|
+100 bp | |
|
+200 bp | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Annual net interest income change from an immediate change in
rates
|
|
$ |
(1,177 |
) |
|
$ |
(246 |
) |
|
$ |
184 |
|
|
$ |
265 |
|
|
$ |
500 |
|
|
Percent change
|
|
|
(2.3 |
)% |
|
|
(.5 |
)% |
|
|
.4 |
% |
|
|
.5 |
% |
|
|
1.0 |
% |
Rate shock analysis assesses the risk of changes in annual net
interest income in the event of an immediate and sustained
parallel change in interest rates. The profile as of
December 31, 2004 indicates a 200 basis point increase in
interest rates generates a decrease in net interest income of
$1,922,000 or a 3.9% reduction in base case projected net
interest income. When interest rates are shocked down 100 basis
points, an increase in net interest income of $13,000 or .03% of
base case projected net interest income would result. These
projections should not be relied upon as indicative of actual
results that would be experienced if such interest rate changes
occurred. 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 twelve month measurement period
and (ii) that changes in market interest rates are parallel
and instantaneous across the yield curve. This analysis is also
limited by the fact that it does not include any balance sheet
repositioning actions the Company may take such as lengthening
or shortening the duration of the securities portfolio, should
severe movements in interest rates occur. These repositioning
actions would likely reduce the variability of net interest
income shown in the extreme interest rate shock forecasts.
The change in the Company’s risk profile from
December 31, 2003 is primarily due to growth and changes in
the composition of the balance sheet, as well as changes in
interest rates from prior year-end levels.
The following gap analysis is prepared based on the maturity and
repricing characteristics of interest earning assets and
interest-bearing liabilities for selected time periods. The
mismatch between asset and liability repricings or maturities
within a time period is commonly referred to as the
“gap” for that period. The following table presents a
static gap analysis as of December 31, 2004 which shows
that the Company’s rate sensitive liabilities may reprice
more quickly than its rate sensitive assets. However, the gap
report does not capture the true dynamics of interest rate
changes including the timing and/or degree of interest rate
changes. While most of the asset categories’ rates change
when certain independent indices (such as the prime rate, Fed
funds rate, LIBOR) change, most liability categories are
repriced at the Company’s discretion subject, however, to
competitive interest rate pressures. Also, the gap report does
not reflect the “call” associated with
32
certain investment assets, which if called, reduces the negative
cumulative gap for the time periods of one year or less. See the
“Investment Securities” section for more information
on “call” characteristics.
Interest Rate Sensitive Position
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
1-90 days | |
|
91-180 days | |
|
181-365 days | |
|
Over 1 year | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Rate sensitive assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fed funds sold and interest-bearing deposits with banks
|
|
$ |
51,479 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
51,479 |
|
| |
Taxable securities
|
|
|
15,113 |
|
|
|
3,195 |
|
|
|
5,380 |
|
|
|
777,357 |
|
|
|
801,045 |
|
| |
Tax exempt securities
|
|
|
2,420 |
|
|
|
520 |
|
|
|
5,281 |
|
|
|
31,811 |
|
|
|
40,032 |
|
| |
Loans, net of unearned discount
|
|
|
446,903 |
|
|
|
67,451 |
|
|
|
116,082 |
|
|
|
441,219 |
|
|
|
1,071,655 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
515,915 |
|
|
$ |
71,166 |
|
|
$ |
126,743 |
|
|
$ |
1,250,387 |
|
|
$ |
1,964,211 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cumulative total
|
|
$ |
515,915 |
|
|
$ |
587,081 |
|
|
$ |
713,824 |
|
|
$ |
1,964,211 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate sensitive liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Savings deposits and NOW accounts
|
|
$ |
291,028 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
291,028 |
|
| |
Money market accounts
|
|
|
166,777 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
166,777 |
|
| |
Time deposits
|
|
|
324,933 |
|
|
|
250,717 |
|
|
|
210,148 |
|
|
|
205,682 |
|
|
|
991,480 |
|
| |
Borrowings
|
|
|
157,110 |
|
|
|
6,006 |
|
|
|
5,018 |
|
|
|
50,074 |
|
|
|
218,208 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
939,848 |
|
|
$ |
256,723 |
|
|
$ |
215,166 |
|
|
$ |
255,756 |
|
|
$ |
1,667,493 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cumulative total
|
|
$ |
939,848 |
|
|
$ |
1,196,571 |
|
|
$ |
1,411,737 |
|
|
$ |
1,667,493 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative gap
|
|
$ |
(423,933 |
) |
|
$ |
(609,490 |
) |
|
$ |
(697,913 |
) |
|
$ |
296,718 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative gap to total assets ratio
|
|
|
(20.36 |
)% |
|
|
(29.27 |
)% |
|
|
(33.51 |
)% |
|
|
14.25% |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements and Other Contractual
Obligations and Commitments
Off-Balance Sheet
Arrangements
The Company does not have any material off-balance sheet
arrangements that have, or are reasonably likely to have, a
current or future effect on the financial condition, changes in
financial condition, revenue or expenses, results of operations,
liquidity, capital expenditures or capital resources.
Contractual
Obligations
The Company has certain obligations and commitments to make
future payments under contracts. The Company’s long-term
borrowing agreements include junior subordinated notes issued to
capital trusts in addition to FHLB of Chicago advances with
various terms and rates collateralized primarily by first
mortgage loans in addition to certain specifically assigned
securities. The operating lease obligations represent lease
payments on the eight real properties leased by the Company
(including the lease signed in December 2004 for future branch
expansion). The Company does not have any capital leases.
Employee benefit obligations represent anticipated payments on
supplemental pension agreements and the executive deferred
compensation plan. Purchase obligations include the minimum
payment required under various non-cancelable contracts for the
purchase of goods or services in the ordinary course of
business. See Note 8, Note 5 and Note 15 to
Item 8 of this Form 10-K for additional information
relating to long term borrowings, operating lease obligations
and employee benefit plans, respectively.
33
The following table represents the Company’s contractual
obligations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less than | |
|
One to | |
|
Three to | |
|
|
|
|
| |
|
one year | |
|
three years | |
|
five years | |
|
Over 5 years | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Long term borrowings
|
|
$ |
42,500 |
|
|
$ |
22,000 |
|
|
$ |
96,918 |
|
|
$ |
23,713 |
|
|
$ |
185,131 |
|
|
Operating lease obligations
|
|
|
469 |
|
|
|
985 |
|
|
|
827 |
|
|
|
355 |
|
|
|
2,636 |
|
|
Employment benefit
obligations(1)
|
|
|
22 |
|
|
|
648 |
|
|
|
199 |
|
|
|
3,325 |
|
|
|
4,194 |
|
|
Purchase obligations
|
|
|
455 |
|
|
|
400 |
|
|
|
— |
|
|
|
— |
|
|
|
855 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
43,446 |
|
|
$ |
24,033 |
|
|
$ |
97,944 |
|
|
$ |
27,393 |
|
|
$ |
192,816 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Balances represent the current actuarial calculation of present
value of potential payout on the supplemental pension agreements
assuming payout begins when fully vested. This total also
includes the liability for the executive deferred compensation
plan assuming retirement at age 72. |
Commitments
In the normal course of business, there are various outstanding
commitments and contingent liabilities, including commitments to
extend credit, performance standby letters of credit and
financial standby letters of credit (collectively
“commitments”) that are not reflected in the
consolidated financial statements.
The Company’s exposure to credit loss in the event of
nonperformance by the other party to the commitments is limited
to their contractual amount. Many commitments expire without
being used. Therefore, the amounts stated below do not
necessarily represent future cash commitments. Commitments to
extend credit are agreements to lend funds to a customer as long
as there is no material violation of any condition established
in the contract. Specifically, home equity lines are reviewed
annually, and the Bank has the ability to deny any future
extensions of credit based upon the borrowers’ credit.
Performance standby letters of credit are conditional
commitments issued by the Company to guarantee the performance
of a customer’s obligation 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. These
commitments are subject to the same credit policies followed for
loans recorded in the financial statements.
A summary of these commitments to extend credit at
December 31, 2004 follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less than | |
|
|
|
|
|
|
| |
|
one year | |
|
One to three | |
|
Three to five | |
|
Over five years | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Commercial loans
|
|
$ |
42,350 |
|
|
$ |
9,111 |
|
|
$ |
4,259 |
|
|
$ |
8 |
|
|
Syndicated loans
|
|
|
— |
|
|
|
6,164 |
|
|
|
53,333 |
|
|
|
3,079 |
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Construction, land acquisition and development loans
|
|
|
45,443 |
|
|
|
30,851 |
|
|
|
12,874 |
|
|
|
— |
|
| |
Commercial mortgage
|
|
|
250 |
|
|
|
713 |
|
|
|
— |
|
|
|
388 |
|
| |
Home equity loans
|
|
|
1,162 |
|
|
|
11,207 |
|
|
|
30,886 |
|
|
|
112,781 |
|
| |
Residential mortgage
|
|
|
127 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Check credit
|
|
|
727 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Consumer
|
|
|
35 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Performance standby letters of credit
|
|
|
8,183 |
|
|
|
3,851 |
|
|
|
— |
|
|
|
— |
|
|
Financial standby letters of credit
|
|
|
1,905 |
|
|
|
307 |
|
|
|
2,788 |
|
|
|
1,922 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments
|
|
$ |
100,182 |
|
|
$ |
62,204 |
|
|
$ |
104,140 |
|
|
$ |
118,178 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
34
Investment Securities
The following table sets forth the carrying values of investment
securities held on the dates indicated.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
U.S. Treasury
|
|
$ |
20,101 |
|
|
$ |
61,745 |
|
|
$ |
26,436 |
|
|
U.S. Government agencies
|
|
|
673,227 |
|
|
|
558,501 |
|
|
|
382,274 |
|
|
Agency mortgage-backed securities
|
|
|
44,940 |
|
|
|
47,384 |
|
|
|
5,111 |
|
|
Agency collateralized mortgage obligations
|
|
|
183 |
|
|
|
190 |
|
|
|
335 |
|
|
State and municipal obligations
|
|
|
43,697 |
|
|
|
40,768 |
|
|
|
42,144 |
|
|
Corporate and other securities
|
|
|
58,929 |
|
|
|
74,883 |
|
|
|
51,185 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total investment portfolio
|
|
$ |
841,077 |
|
|
$ |
783,471 |
|
|
$ |
507,485 |
|
| |
|
|
|
|
|
|
|
|
|
At December 31, 2004 there are no investment securities of
any one issuer in excess of 10% of shareholders’ equity
other than securities of the U.S. Government and its agencies
and the FHLB of Chicago.
The Company’s investment portfolio increased
$57.6 million, or 7%, during 2004 to $841.1 million at
year-end 2004 from $783.5 million at year-end 2003. This
increase was primarily in U.S. Government agency securities and
state and municipal obligations, partially offset by decreases
in U.S. Treasury, agency mortgage-backed securities and
corporate and other securities. The effective duration of the
entire portfolio (excluding FHLB of Chicago stock, money market
funds and equity securities, which have no stated maturity) is
2.63 at December 31, 2004 compared to 4.18 at
December 31, 2003. Effective duration takes into account
all embedded options and represents the ratio of the
proportional change in bond values taking into account that
expected cash flows will fluctuate as interest rates change. In
anticipation of a rising rate environment, the Company
selectively sold securities with a long duration and reinvested
the proceeds in securities that would result in a lower overall
portfolio duration. The average contractual maturity of the
portfolio (with the same exclusions) was 6.3 years at
December 31, 2004 compared to 7.8 years at
December 31, 2003.
U.S. Treasury securities: The Company’s holdings of
U.S. Treasury securities decreased by $41.6 million to
$20.1 million at year-end 2004 from $61.7 million at
year-end 2003. The decrease is primarily due to sales, calls and
maturities of $86.9 million, offset by purchases. The
average contractual maturity of the U.S. Treasury portfolio
decreased to 8.4 years in 2004 from 8.5 years in 2003
and none of the securities had call features.
U.S. Government agencies and mortgage-backed securities:
The Company’s holdings of U.S. Government agency
securities (including agency mortgage-backed securities and
agency collateralized mortgage obligations totaling $45.1
million) increased $112.3 million to $718.4 million at
year-end 2004 from $606.1 million at year-end 2003. The
increase is primarily due to additional purchases of
$730.4 million offset by sales, calls and maturities. The
average contractual maturity of this portfolio decreased to
5.8 years in 2004 compared to 7.1 years in 2003.
At December 31, 2004 and 2003, U.S. Government agencies
include $75 million of securities purchased as part of a
balance sheet arbitrage on a FHLB of Chicago borrowing. The
original securities purchased as part of the arbitrage were
called in 2004 and the Company purchased new securities to
continue this strategy. At December 31, 2004, the coupon on
$40 million of these callable securities is a step-up rate
currently at 4.25% and the coupon on $35 million of these
callable securities is a step-up rate currently at 3.25%, while
the coupon on the FHLB of Chicago advance floats quarterly at 12
basis points over the 3-month LIBOR, which was 2.56% at
December 31, 2004. This FHLB advance is prepayable
quarterly at the Bank’s discretion without penalty.
State and municipal obligations: The Company’s
holdings of state and municipal obligations increased
$2.9 million to $43.7 million at year-end 2004 from
$40.8 million at year-end 2003. The increase is primarily
due to purchases of $22.8 million, offset by sales, calls
and maturities. All municipal securities held are rated
35
“A” or better by one or more of the national rating
services or are “non-rated” issues of local
communities which, through the Bank’s own analysis, are
deemed to be of satisfactory quality. The average contractual
maturity of this portfolio was 3.6 years in 2004 compared
to 4.0 years in 2003.
Corporate and other securities: The Company’s
holdings of corporate and other securities decreased
$16.0 million to $58.9 million in 2004 from
$74.9 million in 2003. The decrease consisted primarily of
the sale of $20.0 million in FHLB of Chicago stock. At
December 31, 2004, the portfolio consisted of
$27.3 million in TRUPS, $19.4 million of FHLB of
Chicago stock, $8.6 million in two issues of FNMA perpetual
preferred stock, $3.0 million in corporate debt and equity
securities, $500,000 in foreign bonds and $113,000 in money
market funds. The average contractual maturity of the TRUPS,
corporate debt and foreign bonds decreased to 22.5 years in
2004 from 24.4 years in 2003. The remaining securities in
the portfolio do not have a stated maturity.
The Company increased its holdings in the FHLB of Chicago stock
in 2003 due to its strong credit quality and attractive
dividend. However, in 2004, concerns about a potential decrease
to the FHLB of Chicago dividend prompted the Company to reduce
its holdings of FHLB of Chicago stock. The FHLB of Chicago
declares a quarterly dividend based on the average stock
holdings for the prior quarter; thus, dividend income from this
source is recorded on a lagging basis which resulted in a yield
of 7.09% for 2004 as compared to 4.19% for 2003. The FHLB of
Chicago declared a quarterly dividend in January 2005 based on
the average balance of stock held during the quarter ending
December 31, 2004 of 5.5%.
In accordance with investment policy, the Company analyzed one
of the two FNMA perpetual preferred stock issues for
other-than-temporary impairment. The Company concluded that the
security was not other-than-temporarily impaired due primarily
to its significant purchase discount along with its bi-annual
interest rate reset characteristics. At the most recent interest
rate reset date, the market value nearly equaled the
Company’s purchase price. The Company will continue to
analyze this security for other-than-temporary impairment
quarterly.
The following table presents total carrying value of callable
securities in the portfolio and their respective coupon range by
investment type as of December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
| |
|
Callable |
|
Callable |
|
Callable in |
|
Callable |
| |
|
in |
|
in |
|
2007 and |
|
in |
| |
|
2005 |
|
2006 |
|
Beyond |
|
Total |
| |
|
|
|
|
|
|
|
|
| |
|
(Dollars in thousands) |
|
U.S. Government agencies:
|
|
|
|
|
|
|
|
|
| |
Total callable
|
|
$549,919 |
|
$81,043 |
|
$20,488 |
|
$651,450 |
| |
In-the-money calls
|
|
$285,595 |
|
$19,515 |
|
$20,488 |
|
$325,598 |
| |
Coupon range
|
|
2.3%-6.0% |
|
4.4%-5.4% |
|
5.0%-6.0% |
|
2.3%-6.0% |
|
State and municipal obligations:
|
|
|
|
|
|
|
|
|
| |
Total callable
|
|
$4,638 |
|
$1,335 |
|
$2,805 |
|
$8,778 |
| |
In-the-money calls
|
|
$3,878 |
|
$1,335 |
|
$2,477 |
|
$7,690 |
| |
Coupon range
|
|
2.4%-6.4% |
|
5.7%-7.5% |
|
3.4%-5.5% |
|
2.4%-7.5% |
|
Corporate and other securities:
|
|
|
|
|
|
|
|
|
| |
Total callable
|
|
$6,116 |
|
$9,923 |
|
$13,666 |
|
$29,705 |
| |
In-the-money calls
|
|
$1,116 |
|
$4,261 |
|
$10,687 |
|
$16,064 |
| |
Coupon range
|
|
3.2%-4.7% |
|
2.4%-9.0% |
|
2.9%-8.4% |
|
2.4%-9.0% |
None of the U.S. Treasuries have call features as of
December 31, 2004.
2003
The Company’s investment portfolio increased
$276.0 million, or 54%, during 2003 to $783.5 million
at year-end from $507.5 million at year-end 2002. This
increase was primarily in the U.S. Treasury, U.S. Government
agency (including mortgage-backed securities) and corporate and
other security portfolios and
36
was the result of excess liquidity received from deposit growth
and softer loan demand. In addition, on December 30, 2003,
the Company purchased $75 million in U.S. Government
Agencies as part of a balance sheet arbitrage initiated to lock
in a favorable spread on an FHLB of Chicago borrowing.
U.S. Treasury securities: The Company increased its
holdings of U.S. Treasuries by $35.3 million to
$61.7 million at year-end 2003 from $26.4 million at
year-end 2002.
U.S. Government agencies and mortgage-backed securities:
The U.S. Government agency securities portfolio (including
agency mortgage backed securities and agency collateralized
mortgage obligations totaling $47.6 million) increased
$218.4 million to $606.1 million at year-end 2003 from
$387.7 million at year-end 2002. The increase is primarily
due to additional purchases of $496.8 million partially offset
by maturities, calls and sales.
State and municipal obligations: The Company’s
holdings of state and municipal obligations decreased
$1.3 million to $40.8 million at year-end 2003 from
$42.1 million at year-end 2002. The decrease is primarily
due to scheduled maturities and calls on securities exceeding
purchases, due to the lower rate environment.
Corporate and other securities: Holdings of corporate and
other securities increased $23.7 million to
$74.9 million in 2003 from $51.2 million in 2002. The
increase consisted primarily of purchases of $30.0 million
in FHLB of Chicago stock and purchases of long-term TRUPS
partially offset by sales which included $15 million in
mutual funds holding U.S. Government agencies. At
December 31, 2003, the portfolio consisted primarily of
$37.3 million of FHLB of Chicago stock, $25.6 million
in TRUPS, and $9.2 million in FNMA perpetual preferred
stock.
The contractual maturity distribution and weighted average yield
of investment securities at December 31, 2004 are presented
in the following table. Actual maturities of securities may
differ from that reflected in the table due to securities with
call features which are assumed to be held to contractual
maturity for maturity distribution purposes.
Analysis of Investment
Portfolio(1)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
U.S. Treasury | |
|
U.S. Government | |
|
State and Municipal | |
|
Corporate and | |
|
|
| |
|
Securities | |
|
Agencies(2) | |
|
Obligations | |
|
Other Securities | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
Amount | |
|
Yield | |
|
Amount | |
|
Yield | |
|
Amount | |
|
Yield(3) | |
|
Amount | |
|
Yield | |
|
Amount | |
|
Yield | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
|
|
|
|
Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$ |
— |
|
|
|
— |
% |
|
$ |
5,064 |
|
|
|
4.55 |
% |
|
$ |
8,337 |
|
|
|
3.57 |
% |
|
$ |
— |
|
|
|
— |
% |
|
$ |
13,401 |
|
|
|
3.94 |
% |
|
1–5 years
|
|
|
— |
|
|
|
— |
|
|
|
280,282 |
|
|
|
3.46 |
|
|
|
24,626 |
|
|
|
4.55 |
|
|
|
2,566 |
|
|
|
6.59 |
|
|
|
307,474 |
|
|
|
3.57 |
|
|
5–10 years
|
|
|
20,101 |
|
|
|
3.80 |
|
|
|
432,691 |
|
|
|
4.51 |
|
|
|
10,685 |
|
|
|
3.88 |
|
|
|
1,985 |
|
|
|
4.08 |
|
|
|
465,462 |
|
|
|
4.46 |
|
|
After 10 years
|
|
|
— |
|
|
|
— |
|
|
|
313 |
|
|
|
3.03 |
|
|
|
49 |
|
|
|
4.95 |
|
|
|
25,340 |
|
|
|
6.82 |
|
|
|
25,702 |
|
|
|
6.77 |
|
|
Other
Securities(4)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
29,038 |
|
|
|
— |
|
|
|
29,038 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
20,101 |
|
|
|
3.80 |
% |
|
$ |
718,350 |
|
|
|
4.10 |
% |
|
$ |
43,697 |
|
|
|
4.20 |
% |
|
$ |
58,929 |
|
|
|
6.61 |
% |
|
$ |
841,077 |
|
|
|
4.18 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average months to maturity
|
|
|
100 |
|
|
|
|
|
|
|
70 |
|
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
270 |
|
|
|
|
|
|
|
76 |
|
|
|
|
|
|
|
| (1) |
Amounts listed in the table are at carrying value and the yield
is calculated based on amortized cost. |
| (2) |
Included in U.S. Government agencies are agency mortgage-backed
securities (“MBS”) and agency collateralized mortgage
obligations (“CMOs”). Given the amortizing nature of
MBS and CMOs, the maturities presented in the table are based on
their estimated average lives at December 31, 2004. The
estimated average lives may differ from actual principal cash
flows since cash flows include prepayments and scheduled
principal amortization. |
| (3) |
Yields on state and municipal obligations include the effects of
tax equivalent adjustments using a tax rate of 35%. |
| (4) |
Other securities include FHLB of Chicago stock, FNMA perpetual
preferred stock, money market funds, and corporate equity
securities which have no stated maturity date; other securities
are not included in the average months to maturity or the
average yield. |
37
Loans
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Commercial
|
|
$ |
116,653 |
|
|
$ |
95,761 |
|
|
$ |
96,681 |
|
|
$ |
100,975 |
|
|
$ |
101,024 |
|
|
Syndicated
|
|
|
34,958 |
|
|
|
33,088 |
|
|
|
39,285 |
|
|
|
45,716 |
|
|
|
35,290 |
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Construction, land acquisition and development
|
|
|
75,833 |
|
|
|
40,493 |
|
|
|
60,805 |
|
|
|
102,594 |
|
|
|
46,082 |
|
| |
Commercial mortgage
|
|
|
247,840 |
|
|
|
234,967 |
|
|
|
245,099 |
|
|
|
213,689 |
|
|
|
181,380 |
|
| |
Residential mortgage
|
|
|
109,097 |
|
|
|
101,133 |
|
|
|
100,840 |
|
|
|
105,168 |
|
|
|
127,794 |
|
| |
Home equity
|
|
|
151,873 |
|
|
|
139,926 |
|
|
|
123,531 |
|
|
|
112,877 |
|
|
|
102,841 |
|
|
Indirect vehicle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Auto
|
|
|
276,411 |
|
|
|
226,877 |
|
|
|
206,568 |
|
|
|
205,298 |
|
|
|
213,940 |
|
| |
Harley Davidson motorcycle
|
|
|
51,560 |
|
|
|
35,957 |
|
|
|
29,552 |
|
|
|
19,013 |
|
|
|
5,408 |
|
|
Consumer
|
|
|
7,443 |
|
|
|
7,487 |
|
|
|
9,731 |
|
|
|
11,353 |
|
|
|
11,399 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
1,071,668 |
|
|
$ |
915,689 |
|
|
$ |
912,092 |
|
|
$ |
916,683 |
|
|
$ |
825,158 |
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Unearned discount
|
|
|
13 |
|
|
|
11 |
|
|
|
11 |
|
|
|
38 |
|
|
|
138 |
|
| |
Allowance for loan losses
|
|
|
8,546 |
|
|
|
8,369 |
|
|
|
7,351 |
|
|
|
6,982 |
|
|
|
5,682 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Loans, net
|
|
$ |
1,063,109 |
|
|
$ |
907,309 |
|
|
$ |
904,730 |
|
|
$ |
909,663 |
|
|
$ |
819,338 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
At December 31, 2004, loans outstanding, net of unearned
discount, increased $156.0 million, or 17%, compared to
2003 due primarily to increases in indirect vehicle,
construction and commercial loans, as well as every loan
category. The growth was the result of new business development
complemented by a reduced amount of payoffs from the level
experienced throughout 2003. Loans have continued to climb since
the low in August 2003 of $863.6 million.
In 2004, the Company added six seasoned lenders, three in
commercial real estate lending, two in commercial lending, and
one in leasing. Two of the senior commercial real estate lenders
are primarily engaged in developing and underwriting
larger-sized real estate loans through their existing networks
of contacts. The leasing officer works within the Commercial
Loan Department, utilizing his referral network among large
financial institutions to purchase discounted leases,
principally the “debt strip” or loan piece. Underlying
credits are typically near-investment or investment grade, with
primary reliance on the credit worthiness of the lessee, rather
than the collateral.
The commercial and syndicated loan portfolios are primarily
secured by business assets. Loans secured by real estate
comprise the greatest percentage of total loans. Commercial
mortgages and construction, land acquisition and development
loans are generally secured by properties in the Chicago
metropolitan area. Substantially all of the Company’s
residential real estate loans are secured by first mortgages,
and home equity loans are secured primarily by junior liens (and
sometimes first liens) on one-to-four family residences in the
Chicago metropolitan area. Substantially all of the
Company’s combined portfolio of residential and home equity
loans have loan to value ratios of 80% or less of the appraised
value. Indirect vehicle loans represent consumer loans made
through a network of new car and Harley Davidson dealers. Other
than the following descriptions, there is no significant
concentration of loans exceeding 10% of total loans in any
specific industry or specific region of the United States other
than the Chicago metropolitan area.
Commercial loans increased $20.9 million to
$116.7 million at December 31, 2004 due primarily to
an increase of $14.7 million in lease financing, bringing
that portfolio to $28.6 million at December 31, 2004.
38
Commercial loans are comprised of approximately 19% new car
dealers; 13% insurance premium receivables; 6% computer system
design services; 5% physicians’ practices; 5% direct
property insurers; 5% commercial transportation leasing and 47%
of various other industries in which the Company has no
significant concentration.
Syndicated loans increased $1.9 million to
$35.0 million at December 31, 2004. Total exposure to
nationally syndicated loans (including unfunded commitments) was
$102.3 million and $76.8 million at December 31,
2004 and 2003, respectively. Of the total exposure,
approximately 29% is in the gaming and leisure industry;
approximately 20% in the food and dairy industry; and 51% in
various other industries in which the Company has no significant
concentration.
Construction, land acquisition and development loans increased
$35.3 million to $75.8 million at December 31,
2004. This increase is due primarily to new loans booked with
balances outstanding totaling $47.2 million, partially
offset by payoffs and paydowns. This category is comprised of
approximately 73% construction of 1 – 4 family detached
homes, condominiums and townhomes in the Chicago area; 21%
multi-family residential projects; and 6% retail developments.
Commercial mortgage loans increased $12.9 million to
$247.8 million at December 31, 2004 due primarily to
new loans booked totaling $91.9 million, offset by payoffs
and paydowns. This portfolio is comprised of approximately 41%
multi-family residential properties; 27% retail properties; 23%
owner occupied office and industrial properties; and 9%
non-owner occupied office and industrial properties.
Residential mortgages increased $8.0 million to
$109.1 million at December 31, 2004 due primarily to
new loans booked, offset by payoffs and paydowns. The Company
kept $40.2 million of the $56.8 million in 2004
mortgage loan originations for the Bank’s portfolio. The
remaining $16.6 million in originations were sold with
servicing released to investors. Generally, at the time of
origination, the Company makes the determination if the loan
will be kept in the portfolio or sold to investors based upon an
analysis of the Bank’s need and current market trends.
Home equity loans increased $11.9 million to
$151.9 million at December 31, 2004. This increase is
due to new originations and, to a lesser extent, increased
usage, partially offset by payoffs due to first mortgage loan
refinancing.
Indirect auto loans increased $49.5 million to
$276.4 million at December 31, 2004 due primarily to
$175.1 million in new loans, offset by payoffs and regular
paydowns. The Company’s indirect auto portfolio consists of
approximately 15,400 loans originated in the Chicago
metropolitan area, of which 81% are new vehicles and 19% are
used vehicles. The Bank is currently seventh in the Chicago
market among banks in new car loan originations. The average
life of the indirect auto portfolio is 2.8 years.
Harley-Davidson motorcycle loans increased $15.6 million to
$51.6 million at December 31, 2004. The Company’s
portfolio consists of approximately 4,400 loans generated in
thirteen states as part of a national marketing initiative, of
which 59% were originated in Illinois or Wisconsin.
The Company did not have any programs to buy subprime indirect
loan paper or any other subprime credit in 2004 or 2003.
2003
At December 31, 2003, loans outstanding, net of unearned
discount, increased $3.6 million compared to 2002. Due to
soft loan demand and increased paydowns, the Company’s loan
portfolio was shrinking through much of 2003, hitting a low of
$863.6 million in August 2003. Loan demand picked up in the
fourth quarter resulting in slight growth year over year.
Commercial loans decreased $1.0 million to
$95.8 million in 2003. This category was comprised of
approximately 20% new car dealers; 9% insurance premium
receivables; 8% physicians’ practices; 7% electrical
contractors; and 56% of various other industries in which the
Company had no significant concentration.
39
Syndicated loans decreased $6.2 million to
$33.1 million primarily due to the sale of
$8.5 million in balances ($9.8 million of exposure) on
two credits. Total exposure to nationally syndicated loans
(including unfunded commitments) was $76.8 million and
$72.1 million at December 31, 2003 and 2002,
respectively. There was no concentration of these loans in any
region of the United States.
Construction, land acquisition and development loans decreased
$20.3 million to $40.5 million at December 31,
2003. This decrease was due to increased payoffs and paydowns,
partially offset by new business generation. This category was
comprised of approximately 73% construction of
1 – 4 family detached homes, condominiums and
townhomes in the Chicago area; 21% multi-family residential
projects; and 6% retail developments.
Commercial real estate loans decreased $10.1 million to
$235.0 million in 2003 due to increased payoffs and
paydowns, partially offset by new business generation. In the
low interest rate environment experienced during 2003, borrowers
were willing to pay significant prepayment penalties for the
ability to lock their loan in at a new lower rate. The
commercial real estate portfolio was comprised of approximately
43% multi-family residential properties; 27% retail properties;
18% owner occupied office and industrial properties; and 12%
non-owner occupied office and industrial properties.
Home equity loans increased $16.4 million to
$139.9 million in 2003. This increase was due to new
originations and, to a lesser extent, increased usage as a
result of successful marketing efforts in a low interest rate
environment. These increases were offset by increased payoffs
due to first mortgage loan refinancing.
Residential mortgages increased slightly to $101.1 million
in 2003. To offset payoffs due primarily to mortgage
refinancing, the Company retained for the Bank’s portfolio
$62.0 million of the $144.1 million of 2003 mortgage
loan originations. The remaining $82.1 million in
originations were sold with servicing released to investors.
Indirect auto loans increased $20.3 million to
$226.9 million primarily due to $143.3 million in new
loans, offset by payoffs and regular paydowns. The
Company’s indirect auto portfolio consisted of
approximately 14,300 loans originated in the Chicago land area,
of which 80% were new and 20% were used vehicles.
Harley-Davidson motorcycle loans increased $6.4 million to
$36.0 million. The Company’s portfolio consisted of
approximately 3,100 loans generated in thirteen states as part
of a national marketing initiative, of which 63% were originated
in Illinois or Wisconsin.
Consumer loans decreased $2.2 million to $7.5 million
and consisted primarily of student loans, direct automobile
loans and check credit loans.
The Company did not have any programs to buy subprime indirect
loan paper or any other subprime credit in 2003 or 2002.
40
The following table indicates the remaining contractual maturity
distribution of selected loans at December 31, 2004:
Maturity Distribution of Selected Loans
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
One year | |
|
One to five | |
|
Five to ten | |
|
Over ten | |
|
|
| |
|
or less(1) | |
|
years | |
|
years | |
|
years | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Commercial and Syndicated
|
|
$ |
43,536 |
|
|
$ |
93,983 |
|
|
$ |
9,580 |
|
|
$ |
4,512 |
|
|
$ |
151,611 |
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Construction, land acquisition and development
|
|
|
47,405 |
|
|
|
28,428 |
|
|
|
— |
|
|
|
— |
|
|
|
75,833 |
|
| |
Commercial mortgage
|
|
|
11,293 |
|
|
|
183,913 |
|
|
|
46,676 |
|
|
|
5,958 |
|
|
|
247,840 |
|
| |
Residential mortgage
|
|
|
877 |
|
|
|
30,159 |
|
|
|
6,961 |
|
|
|
71,100 |
|
|
|
109,097 |
|
| |
Home equity
|
|
|
1,706 |
|
|
|
41,751 |
|
|
|
108,416 |
|
|
|
— |
|
|
|
151,873 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
104,817 |
|
|
$ |
378,234 |
|
|
$ |
171,633 |
|
|
$ |
81,570 |
|
|
$ |
736,254 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Includes demand notes. |
The following table indicates, for the loans in the Maturity
Distribution table, the amounts due after one year which have
fixed and variable interest rates at December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fixed | |
|
Variable | |
|
|
| |
|
Rate | |
|
Rate | |
|
Total | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Commercial and Syndicated
|
|
$ |
26,871 |
|
|
$ |
81,204 |
|
|
$ |
108,075 |
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Construction, land acquisition and development
|
|
|
1,837 |
|
|
|
26,591 |
|
|
|
28,428 |
|
| |
Commercial mortgage
|
|
|
161,066 |
|
|
|
75,481 |
|
|
|
236,547 |
|
| |
Residential mortgage
|
|
|
84,916 |
|
|
|
23,304 |
|
|
|
108,220 |
|
| |
Home equity
|
|
|
1,444 |
|
|
|
148,723 |
|
|
|
150,167 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
276,134 |
|
|
$ |
355,303 |
|
|
$ |
631,437 |
|
| |
|
|
|
|
|
|
|
|
|
Variable rate loans are those on which the interest rate can be
adjusted for changes in the Company’s index rate (similar
to prime rate), various maturity U.S. Treasury rates, The
Wall Street Journal’s published prime rate, LIBOR or
the brokers’ call money rate. Certain of the loans
classified as variable rate have a fixed rate for a certain
period and then adjust after the fixed period expires. Fixed
rate loans are those on which the interest rate cannot be
changed during the term of the loan.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed
adequate by management to absorb estimated probable loan losses.
Management’s periodic evaluation of the adequacy of the
allowance is based on the Company’s past loan loss
experience, 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.
The Company’s charge-off policy varies with respect to the
category of and specific circumstances surrounding each loan
under consideration. The Company records charge-offs on the
basis of management’s ongoing evaluation of collectibility.
Consumer loans are charged off at the earlier of the time
management can quantify a loss or when the loan becomes
180 days past due. Indirect vehicle loans are generally
charged off
41
within 120 days of being past due with the exception of a
pending insurance claim or the pending resolution of a
Chapter 13 bankruptcy payment plan.
The Company records specific valuation allowances on commercial,
commercial real estate mortgage and construction loans when a
loan is considered to be impaired. A loan is impaired when,
based on an evaluation of current information and events, it is
probable that the Company will not be able to collect all
amounts due (principal and interest) pursuant to the original
contractual terms. The Company measures impairment based upon
the present value of expected future cash flows discounted at
the loan’s original effective interest rate or the fair
value of the collateral if the loan is collateral dependent.
Large groups of homogeneous loans, such as residential mortgage,
home equity, indirect vehicle and consumer loans, are
collectively evaluated for impairment and not subject to
impaired loan disclosures. Interest income on impaired loans is
recognized using the cash basis method.
42
The following table summarizes loan loss experience for each of
the last five years.
Summary of Loan Loss Experience
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Average loans for the year, net of unearned discount and
allowance for loan losses
|
|
$ |
990,646 |
|
|
$ |
882,375 |
|
|
$ |
916,377 |
|
|
$ |
863,681 |
|
|
$ |
772,992 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses, beginning of the year
|
|
$ |
8,369 |
|
|
$ |
7,351 |
|
|
$ |
6,982 |
|
|
$ |
5,682 |
|
|
$ |
4,828 |
|
|
Charge-offs during the
year:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Construction, land acquisition and development loans
|
|
|
(64 |
) |
|
|
— |
|
|
|
(13,963 |
) |
|
|
— |
|
|
|
— |
|
| |
|
Commercial mortgage loans
|
|
|
(28 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
Home equity loans
|
|
|
(15 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Commercial loans
|
|
|
(76 |
) |
|
|
— |
|
|
|
— |
|
|
|
(7 |
) |
|
|
(40 |
) |
| |
Syndicated loans
|
|
|
— |
|
|
|
(815 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Indirect vehicle loans
|
|
|
(486 |
) |
|
|
(478 |
) |
|
|
(533 |
) |
|
|
(304 |
) |
|
|
(150 |
) |
| |
Overdraft loans and uncollected funds
|
|
|
(5 |
) |
|
|
(5 |
) |
|
|
(11 |
) |
|
|
(3 |
) |
|
|
(4 |
) |
| |
Consumer loans
|
|
|
(9 |
) |
|
|
(8 |
) |
|
|
(4 |
) |
|
|
(9 |
) |
|
|
(16 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total charge-offs
|
|
|
(683 |
) |
|
|
(1,306 |
) |
|
|
(14,511 |
) |
|
|
(323 |
) |
|
|
(210 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries during the
year:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Construction, land acquisition and development loans
|
|
|
15 |
|
|
|
492 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
Home equity loans
|
|
|
15 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Commercial loans
|
|
|
1 |
|
|
|
1 |
|
|
|
44 |
|
|
|
— |
|
|
|
75 |
|
| |
Indirect vehicle loans
|
|
|
272 |
|
|
|
215 |
|
|
|
161 |
|
|
|
41 |
|
|
|
32 |
|
| |
Overdraft loans and uncollected funds
|
|
|
50 |
|
|
|
— |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
| |
Consumer loans
|
|
|
7 |
|
|
|
16 |
|
|
|
24 |
|
|
|
31 |
|
|
|
56 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total recoveries
|
|
|
360 |
|
|
|
724 |
|
|
|
230 |
|
|
|
73 |
|
|
|
164 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs during the year
|
|
|
(323 |
) |
|
|
(582 |
) |
|
|
(14,281 |
) |
|
|
(250 |
) |
|
|
(46 |
) |
|
Provision for loan losses
|
|
|
500 |
|
|
|
1,600 |
|
|
|
14,650 |
|
|
|
1,550 |
|
|
|
900 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses, end of year
|
|
$ |
8,546 |
|
|
$ |
8,369 |
|
|
$ |
7,351 |
|
|
$ |
6,982 |
|
|
$ |
5,682 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net charge-offs to average loans outstanding
|
|
|
.03 |
% |
|
|
.07 |
% |
|
|
1.54 |
% |
|
|
.03 |
% |
|
|
.01 |
% |
|
Allowance for loan losses as a percent of loans outstanding, net
of unearned discount at end of the year
|
|
|
.80 |
% |
|
|
.91 |
% |
|
|
.81 |
% |
|
|
.76 |
% |
|
|
.69 |
% |
|
Ratio of allowance for loan losses to nonperforming loans
|
|
|
57.74 |
x |
|
|
15.44 |
x |
|
|
5.09 |
x |
|
|
4.03 |
x |
|
|
12.94 |
x |
|
|
| (1) |
There have been no losses or recoveries in residential mortgage
loan portfolio and no recoveries in the commercial mortgage and
syndicated loan portfolios over the past five years. |
Net charge-offs for 2004 totaled $323,000, or .03%, of average
loans outstanding. Gross charge-offs totaled $683,000, of which
$486,000 related to the Company’s indirect vehicle
portfolio and $104,000 was a write-down of a related commercial
loan and commercial real estate loan. The property was
transferred into OREO. Gross recoveries of $360,000 relate
primarily to the Company’s indirect vehicle portfolio in
addition to a $50,000 partial recovery on an uncollected funds
charge-off from 1998. Net charge-offs as a percent of the
average indirect vehicle portfolio decreased to .07% in 2004
from .11% in 2003, well below peers.
43
Net charge-offs for 2003 totaled $582,000, or .07%, of average
loans outstanding. Gross charge-offs in 2003 of $1,306,000
relate primarily to $815,000 charged off on the sale into the
secondary market of $9.8 million in exposure
($8.5 million of outstanding balances) on two performing
nationally syndicated credits. With the exception of the
charge-offs on these two credits, substantially all other
charge-offs relate primarily to the Company’s indirect
vehicle portfolio. Net charge-offs as a percent of the average
indirect vehicle portfolio decreased to .11% in 2003 from .16%
in 2002. Gross recoveries in 2003 totaled $724,000, of which
$492,000 related to a hotel loan charged off in 2002. The
remaining recoveries were primarily from indirect vehicle loans.
The Company’s allowance for loan losses as a percent of
loans outstanding was .80% at December 31, 2004 as compared
to .91% in 2003 and .81% in 2002. The allowance for loan losses
is sufficient to provide for probable loan losses based upon
management’s evaluation of the risks inherent in the
various loan categories. Management believes the allowance for
loan losses is at an adequate level. Refer to the section titled
“Application of Critical Accounting Policies” for a
detailed description of the Company’s policy regarding the
Allowance for Loan Losses.
44
The following table shows the allocation of the allowance for
loan losses by loan type for each of the last five years.
Allocation of Allowance for Loan Losses
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Allocation of allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Commercial loans
|
|
$ |
821 |
|
|
$ |
951 |
|
|
$ |
1,125 |
|
|
$ |
887 |
|
|
$ |
626 |
|
| |
Syndicated loans
|
|
|
567 |
|
|
|
582 |
|
|
|
2,531 |
|
|
|
810 |
|
|
|
143 |
|
| |
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Construction, land acquisition and development loans
|
|
|
332 |
|
|
|
42 |
|
|
|
64 |
|
|
|
257 |
|
|
|
210 |
|
| |
|
Commercial mortgage loans
|
|
|
381 |
|
|
|
386 |
|
|
|
740 |
|
|
|
413 |
|
|
|
83 |
|
| |
|
Residential mortgage loans
|
|
|
71 |
|
|
|
75 |
|
|
|
100 |
|
|
|
56 |
|
|
|
57 |
|
| |
|
Home equity loans
|
|
|
45 |
|
|
|
46 |
|
|
|
47 |
|
|
|
44 |
|
|
|
116 |
|
| |
Indirect vehicle loans
|
|
|
1,521 |
|
|
|
1,319 |
|
|
|
1,233 |
|
|
|
1,241 |
|
|
|
1,104 |
|
| |
Consumer loans
|
|
|
39 |
|
|
|
42 |
|
|
|
47 |
|
|
|
54 |
|
|
|
82 |
|
| |
Unallocated
|
|
|
4,769 |
|
|
|
4,926 |
|
|
|
1,464 |
|
|
|
3,220 |
|
|
|
3,261 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total allowance
|
|
$ |
8,546 |
|
|
$ |
8,369 |
|
|
$ |
7,351 |
|
|
$ |
6,982 |
|
|
$ |
5,682 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of loans to gross loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Commercial
|
|
|
10.9 |
% |
|
|
10.5 |
% |
|
|
10.6 |
% |
|
|
11.0 |
% |
|
|
12.2 |
% |
| |
Syndicated
|
|
|
3.3 |
|
|
|
3.6 |
|
|
|
4.3 |
|
|
|
5.0 |
|
|
|
4.3 |
|
| |
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Construction, land acquisition and development
|
|
|
7.1 |
|
|
|
4.4 |
|
|
|
6.6 |
|
|
|
11.2 |
|
|
|
5.6 |
|
| |
|
Commercial mortgage
|
|
|
23.1 |
|
|
|
25.7 |
|
|
|
26.9 |
|
|
|
23.3 |
|
|
|
22.0 |
|
| |
|
Residential mortgage
|
|
|
10.2 |
|
|
|
11.0 |
|
|
|
11.1 |
|
|
|
11.5 |
|
|
|
15.5 |
|
| |
|
Home equity
|
|
|
14.2 |
|
|
|
15.3 |
|
|
|
13.5 |
|
|
|
12.3 |
|
|
|
12.4 |
|
| |
Indirect vehicle
|
|
|
30.6 |
|
|
|
28.7 |
|
|
|
25.9 |
|
|
|
24.5 |
|
|
|
26.6 |
|
| |
Consumer
|
|
|
0.6 |
|
|
|
0.8 |
|
|
|
1.1 |
|
|
|
1.2 |
|
|
|
1.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The allocation for construction, land acquisition and
development loans and indirect vehicle loans increased in 2004
from 2003 due primarily to the overall increase in the portfolio
balance.
The allocation for commercial, syndicated and commercial real
estate loans decreased in 2003 from 2002 due to a decrease in
the level of Management Watch list loans due partially to the
sale into the secondary market of two nationally syndicated
credits (see “Summary of Loan Loss Experience”) and,
to a lesser extent, a reduction of the outstanding balances in
the portfolios. The allocation for construction, land
acquisition and development loans decreased due to a reduction
in the portfolio balance. In calculating the allocation of
allowance for construction loans, the charge-off of the
fraudulent loan in 2002 was not considered in the Bank’s
historical charge-off data due to the isolated nature of the
fraud. The unallocated reserve increased due to
management’s ongoing review of the qualitative factors,
including economic trends, credit concentrations, industry
risks, and the opinions of Bank management.
45
Asset Quality
The accrual of interest is discontinued on commercial, real
estate and consumer loans when the collectibility of contractual
principal or interest is deemed doubtful by management or when
90 days or more past due and the loan is not well secured
or in the process of collection. Interest income is recorded on
these loans only as it is collected. Interest payments on
nonaccrual loans may be applied directly to loan principal for
accounting purposes.
The following table summarizes the Company’s nonperforming
assets.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Nonaccruing loans
|
|
$ |
— |
|
|
$ |
293 |
|
|
$ |
821 |
|
|
$ |
1,295 |
|
|
$ |
121 |
|
|
Loans which are past due 90 days or more
|
|
|
148 |
|
|
|
249 |
|
|
|
623 |
|
|
|
437 |
|
|
|
318 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total nonperforming loans
|
|
|
148 |
|
|
|
542 |
|
|
|
1,444 |
|
|
|
1,732 |
|
|
|
439 |
|
|
Other real estate owned
|
|
|
9,857 |
|
|
|
16,130 |
|
|
|
7,944 |
|
|
|
— |
|
|
|
— |
|
|
Repossessed vehicles
|
|
|
145 |
|
|
|
106 |
|
|
|
217 |
|
|
|
146 |
|
|
|
152 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total nonperforming assets
|
|
$ |
10,150 |
|
|
$ |
16,778 |
|
|
$ |
9,605 |
|
|
$ |
1,878 |
|
|
$ |
591 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans outstanding
|
|
|
.01 |
% |
|
|
.06 |
% |
|
|
.16 |
% |
|
|
.19 |
% |
|
|
.05 |
% |
|
Nonperforming assets to total assets
|
|
|
.49 |
% |
|
|
.91 |
% |
|
|
.60 |
% |
|
|
.14 |
% |
|
|
.05 |
% |
|
Nonperforming assets to total capital
|
|
|
7.6 |
% |
|
|
13.88 |
% |
|
|
8.58 |
% |
|
|
1.89 |
% |
|
|
.67 |
% |
There were no nonaccrual loans at December 31, 2004. At
December 31, 2003, nonaccrual loans totaled $293,000 and
consisted of a $113,000 residential mortgage loan, a $91,000
commercial mortgage loan, a $74,000 commercial loan and a
$15,000 home equity loan, all of which were in foreclosure.
OREO
At December 31, 2004, the Company had two properties in
OREO totaling $9.857 million. Of this, $9.761 million
consisted of the remaining unsold units and parking spaces of a
luxury condominium project located at 60 W. Erie Street in River
North in Chicago. Title to the property was acquired in November
2002 following the discovery early in May of the
developer’s bank fraud, and it was recorded at its then net
realizable value. The project, which consisted of
24 condominium units and 53 deeded parking spaces, was
completed within budget during the first quarter of 2004.
Through December 31, 2004, 14 units and
32 parking spaces were sold and occupied.
The repayment of the Bank’s investment in the project is
dependent on the strength of the Chicago luxury condominium
market. In September 2004, due to an oversupply of luxury
condominiums in the Chicago market, the Company performed a
market pricing analysis and, as a result, reduced the prices of
the remaining units. In addition, the Company changed sales
agents to market the remaining units.
As a consequence, the Company recorded a provision for loss on
OREO of $1,217,000 ($791,000 after-tax) to reflect the
project’s updated net realizable value. Since acquisition
of the property, the Company has recorded a cumulative provision
for loss on this OREO of $2.632 million. At
December 31, 2004, the property was recorded at its net
realizable value of $9.761 million. Management will
continue to evaluate the property quarterly for impairment and
make additional valuation adjustments as deemed necessary.
At March 10, 2005, the property was recorded at its net
realizable value of $6.272 million. Also, as of
March 10, 2005, 17 of the 24 units and 38 of the
53 parking spaces are sold and occupied. The Company has
contracts pending with escrow deposits on 3 additional units
plus 5 parking spaces. In addition, there are contracts still
pending attorney review on another 2 units and 4 parking spaces.
46
A schedule of activity in this OREO property for 2004, 2003 and
since its acquisition is shown in the following table:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Since Acquisition | |
| |
|
2004 | |
|
2003 | |
|
(November 2002) | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Beginning Balance
|
|
$ |
16,130 |
|
|
$ |
7,944 |
|
|
$ |
— |
|
|
Transfer of net realizable value to OREO
|
|
|
— |
|
|
|
— |
|
|
|
3,606 |
|
|
Funding towards project
|
|
|
2,386 |
|
|
|
12,135 |
|
|
|
18,859 |
|
|
Sales proceeds, net
|
|
|
(7,538 |
) |
|
|
(2,534 |
) |
|
|
(10,072 |
) |
|
Provision for OREO
|
|
|
(1,217 |
) |
|
|
(1,415 |
) |
|
|
(2,632 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Balance at December 31
|
|
$ |
9,761 |
|
|
$ |
16,130 |
|
|
$ |
9,761 |
|
| |
|
|
|
|
|
|
|
|
|
The Bank remains the plaintiff in a number of civil lawsuits
brought against various individuals and entities, which arose in
connection with the 60 W. Erie fraud. Jeffrey Grossman and
Donald Grauer, the two principals of the developer in the
original project, each pled guilty in the U.S. District Court
for the Northern District of Illinois pursuant to plea
agreements between each defendant and the U.S. Attorney’s
Office. After entering his plea agreement and while free on
bond, following the discovery of an unrelated fraud, Donald
Grauer committed suicide. The Government is seeking mandatory
restitution from Grossman and the estate of Grauer on behalf of
the Bank and other victims for losses resulting from this
scheme. The amount and timing of any recoveries from such
restitution cannot be ascertained at this time. Dale Tarantur,
another defendant, also pled guilty and was sentenced to house
arrest and ordered to pay the Bank $32,000 in restitution, which
the Bank received in February 2005.
The second property in OREO is a commercial real estate property
located in Chicago Heights, Illinois. This property is recorded
at its net realizable value of $96,000.
Repossessed Autos
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
Consolidated Balance Sheet. The typical holding period for
resale of repossessed vehicles is 90 days unless
significant repairs to the vehicle are needed which occasionally
results in a longer holding period. The Bank’s portfolio of
repossessed vehicles totaled $145,000 and $106,000 at
December 31, 2004 and 2003, respectively.
Potential Problem
Loans
In addition to nonperforming assets, there are certain loans in
the portfolio that management has identified, through its
problem loan identification process, which exhibit a higher than
normal credit risk. However, these loans are still performing
and, accordingly, are not included in nonperforming loans. The
balance in this category at any reporting period can fluctuate
widely. The Company has potential problem loans, including
related outstanding commitments, totaling $259,000 at
December 31, 2004, down from $8.9 million at
December 31, 2003.
Deposits
At year-end 2004, total deposits were $1.715 billion, an
increase of $256.0 million, or 18%, compared to 2003.
Interest-bearing deposits increased $240.9 million
primarily due to an increase of $181.4 million in time
deposits, $43.6 million in money market accounts, and
$15.9 million in savings deposits and NOW accounts. The
growth in time deposits was primarily due to a
$175.5 million increase in public funds to a total of
$402.6 million resulting from new relationships with
various public school districts throughout Illinois and
continued deposit growth in the Countryside, Graue Mill and St.
Charles branches opened in 2003 (up $39.1 million to
$129.6 million). Money market growth was fueled primarily
by new municipal customers. The growth in savings deposits and
NOW accounts was primarily due to the tiered-rate retail checking
47
product. Nonintereset-bearing demand deposits increased
$15.2 million primarily from treasury management clients.
Average Deposits and Rate by Type
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
Amount | |
|
Rate | |
|
Amount | |
|
Rate | |
|
Amount | |
|
Rate | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Noninterest-bearing demand deposits
|
|
$ |
271,259 |
|
|
|
— |
% |
|
$ |
246,525 |
|
|
|
— |
% |
|
$ |
216,100 |
|
|
|
— |
% |
|
Savings deposits and NOW accounts
|
|
|
281,964 |
|
|
|
1.12 |
|
|
|
214,120 |
|
|
|
1.01 |
|
|
|
144,650 |
|
|
|
1.18 |
|
|
Money market accounts
|
|
|
141,234 |
|
|
|
1.28 |
|
|
|
132,964 |
|
|
|
1.15 |
|
|
|
153,379 |
|
|
|
2.00 |
|
|
Time deposits
|
|
|
928,822 |
|
|
|
2.28 |
|
|
|
732,738 |
|
|
|
2.44 |
|
|
|
654,877 |
|
|
|
3.42 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,623,279 |
|
|
|
1.61 |
% |
|
$ |
1,326,347 |
|
|
|
1.63 |
% |
|
$ |
1,169,006 |
|
|
|
2.32 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average deposits for 2004 increased $296.9 million, or 22%,
as compared to 2003. The increase is due to a
$196.1 million increase in average time deposits; a
$67.8 million increase in average savings deposits and NOW
accounts; a $24.7 million increase in average
noninterest-bearing demand deposits; and an $8.3 million
increase in average money market accounts.
Average deposits for 2003 increased $157.3 million, or 13%,
as compared to 2002. The increase is due to a $77.9 million
increase in average time deposits; a $69.5 million increase
in average savings deposits and NOW accounts; and a
$30.4 million increase in average noninterest-bearing
demand deposits, offset by a $20.4 million decrease in
average money market deposits.
Maturities of time deposits of $100,000 or more outstanding at
December 31, 2004 are summarized as follows:
| |
|
|
|
|
|
| |
|
Amount | |
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Three months or less
|
|
$ |
259,103 |
|
|
Over three through six months
|
|
|
159,769 |
|
|
Over six through twelve months
|
|
|
108,653 |
|
|
Over twelve months
|
|
|
87,114 |
|
| |
|
|
|
| |
Total
|
|
$ |
614,639 |
|
| |
|
|
|
Borrowings
Short-term borrowings include Fed funds purchased, securities
sold under agreements to repurchase, treasury, tax and loan
demand notes, and draws on the Company’s line of credit.
These totaled $33.1 million at December 31, 2004
compared to $69.9 million at the end of 2003 and
$84.6 million at December 31, 2002. The
$36.8 million decrease in 2004 and the $14.7 million
decrease in 2003 was primarily due to decreases in commercial
repurchase agreements.
As a member of the FHLB of Chicago, the Bank may obtain advances
secured by certain of its residential mortgage loans and other
assets. The Company continued to utilize the FHLB of Chicago
advances due to the comparatively favorable terms available.
Borrowings decreased slightly to $161.4 million at
December 31, 2004 from $161.5 million at
December 31, 2003. In 2003 total FHLB of Chicago borrowings
increased $59.5 million, or 58%, from $102.0 million
at December 31, 2002 due primarily to $75 million
borrowed on December 30, 2003 to purchase U.S. Government
agency securities as part of a balance sheet arbitrage. FHLB of
Chicago borrowings mature from 2005 to 2009 and bear interest
rates ranging from 2.03% to 7.14%. See Note 8 to the
Company’s financial statements under Item 8 of this
Form 10-K for additional information.
The Company established three separate statutory trusts in 2003,
2002, and 2000 for the purpose of issuing, in aggregate,
$23 million of Trust Preferred Capital Securities
(“TRUPS”) as part of three separate pooled trust
preferred offerings distributed in institutional private
placements. The proceeds from such
48
issuances were used by the trusts to purchase junior
subordinated notes of the Company, which are the sole assets of
each trust. The Company wholly owns all of the common securities
of each trust which, in the aggregate, total $713,000.
In accordance with FIN No. 46R, these statutory trusts
qualify as variable interest entities for which the Company is
not the primary beneficiary and, therefore, ineligible for
consolidation. Accordingly, the statutory trusts were
deconsolidated on January 1, 2004, and are now accounted
for using the equity method. The $23.713 million of junior
subordinated notes issued by the Company to the statutory trusts
are reflected in the Company’s December 31, 2004
consolidated balance sheet as “Junior subordinated notes
issued to capital trusts” in lieu of the $23 million
of TRUPS reported in the balance sheet at December 31,
2003. The equity in the common securities of $713,000 is
included in “Other assets” on the consolidated balance
sheet at December 31, 2004.
Capital Resources
One of the Company’s primary objectives is to maintain a
strong capital position to warrant the confidence of its
customers, shareholders and bank regulatory agencies and to take
advantage of profitable growth opportunities that may arise.
Banking is inherently a risk-taking activity requiring a
sufficient level of capital to effectively and efficiently
manage these risks. The Company’s capital objectives are to:
|
|
|
| |
• |
maintain sufficient capital to support the risk characteristics
of the Company and the Bank; and |
| |
| |
• |
maintain capital ratios which meet and exceed the
“well-capitalized” regulatory capital ratio guidelines
for the Bank, thereby minimizing regulatory intervention and
lowering FDIC assessments. |
At December 31, 2004, the Company’s shareholders’
equity totaled $133.8 million. The Company’s and the
Bank’s capital ratios not only exceeded minimum regulatory
guidelines, but also the FDIC criteria for
“well-capitalized” banks. See Note 11 to the
Company’s financial statements under Item 8 of this
Form 10-K for regulatory capital disclosures.
As discussed in “Borrowings”, the Company adopted FIN
No. 46R which required the deconsolidation of the three
statutory trust subsidiaries for financial statement
presentation. The $23.713 million of junior subordinated
notes issued to capital trusts net of the $713,000 equity in
common securities of the statutory trusts is included in the
Tier 1 Capital calculation below. On March 1, 2005, the
Board of Governors of the Federal Reserve System issued a final
ruling on the inclusion of TRUPS in their Tier 1 Capital
calculation for regulatory capital purposes. This rule reduces
the allowable level of TRUPS for purposes of calculating Tier 1
Capital to be 25% of core capital elements net of goodwill and
includes a phase out period for the final five years prior to
the TRUP maturity. Under the new rules, the Company would still
be considered “well capitalized” as the current level
of TRUPS will still be within the new allowable limits.
In 2004 cash dividends declared totaled $6,237,000, a 31%
increase from 2003. In 2004, the Company increased dividends 14%
to continue to enable its shareholders to take advantage of the
lower 15% Federal tax rate applicable to dividends. The Company
has increased dividends each year over the last thirteen years.
In 2003, cash dividends declared totaled $4,747,000, a 37%
increase from 2002. The dividend payout ratio for 2004 was
32.7%, as compared to 25.75% in 2003.
In 2000, the Board of Directors approved a stock repurchase
program which authorizes (but does not require) the Company to
repurchase up to 300,000 shares (or approximately 3% of
outstanding shares) of common stock through January 2005 (as
extended). At its January 2005 meeting, the Board of Directors
again extended the repurchase program through January 2006.
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. In 2004, the Company repurchased
32,353 shares at an average price of $29.95. In 2003, the
Company repurchased 7,500 shares at an average price of
$19.88. Through December 31, 2004, the Company had
repurchased 183,763 shares under this plan at
49
an average price of $15.42 per share, and there are
116,237 shares remaining available for repurchases under
this program.
Branch Expansion
The Company’s banking subsidiary is Oak Brook Bank. The
Bank currently operates seventeen banking offices: fifteen in
the western suburbs of Chicago, one in the northern suburbs of
Chicago, and one at Huron and Dearborn streets in downtown
Chicago, in addition to a Call Center at 800-536-3000 and
an Internet branch at www.obb.com.
In March 2004, the Bank announced plans to construct its 18th
office on Lyman Avenue, just south of 75th Street in Darien,
Illinois. The Bank acquired the 1.02 acre site on March 30,
2004. The Bank expects to open its Darien branch in March 2005.
In July 2004, the Bank announced plans to construct its 19th
office at 212-214 West Street, just south of the Metra commuter
train station in Wheaton, Illinois. The Bank acquired the
property in August 2004. Bank regulatory and municipal approvals
have been obtained and the Bank is awaiting its building
permits. The Bank expects to start construction in early spring
and to complete its Wheaton branch in late 2005.
In December 2004, the Bank announced plans to open its 20th
office at 356 Park Avenue in Glencoe, Illinois, in a very
affluent part of Chicago’s North Shore, subject to Bank
regulatory and local building approvals. This leased branch
office will be located at the southeast corner of Vernon and
Park Avenues, in the heart of the community’s retail
district. The Bank expects to open its Glencoe branch in the
latter part of 2005.
In January 2005, the Bank announced plans to construct its 21st
office in Homer Glen, Illinois, near the intersection of 143rd
Street and Bell Road. A contract to purchase the 1.2 acre
site was formalized on January 14, 2005. The Bank expects
to open its Homer Glen branch in the second quarter of 2006.
The Company’s primary growth strategy continues to
emphasize branch expansion in the Chicago metropolitan area,
especially the western suburbs of Chicago. This organic growth
model focuses primarily on providing market fill-ins in the
Bank’s core west suburban market; extending our market to
locations the Bank has concentrations of deposit and loan
customers but no physical presence; and, extending our market
into high growth outlying areas. The Bank is continuously
seeking opportunities that meet these criteria. Although this
form of growth requires a significant investment in nonearning
assets during the construction phase and operating costs for
several years exceed revenues, the Company believes its market
warrants judicious office additions.
Condensed Quarterly Earnings Summary
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
Fourth | |
|
Third | |
|
Second | |
|
First | |
|
Fourth | |
|
Third | |
|
Second | |
|
First | |
| |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Interest income
|
|
$ |
22,752 |
|
|
$ |
22,731 |
|
|
$ |
20,856 |
|
|
$ |
20,372 |
|
|
$ |
19,937 |
|
|
$ |
19,635 |
|
|
$ |
20,079 |
|
|
$ |
20,284 |
|
|
Interest expense
|
|
|
9,492 |
|
|
|
8,963 |
|
|
|
7,591 |
|
|
|
7,254 |
|
|
|
7,020 |
|
|
|
6,582 |
|
|
|
7,295 |
|
|
|
7,807 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$ |
13,260 |
|
|
$ |
13,768 |
|
|
$ |
13,265 |
|
|
$ |
13,118 |
|
|
$ |
12,917 |
|
|
$ |
13,053 |
|
|
$ |
12,784 |
|
|
$ |
12,477 |
|
|
Provision for loan losses
|
|
|
— |
|
|
|
— |
|
|
|
250 |
|
|
|
250 |
|
|
|
250 |
|
|
|
350 |
|
|
|
250 |
|
|
|
750 |
|
|
Other income
|
|
|
4,389 |
|
|
|
4,846 |
|
|
|
4,731 |
|
|
|
4,566 |
|
|
|
4,157 |
|
|
|
4,422 |
|
|
|
5,133 |
|
|
|
4,723 |
|
|
Other expense
|
|
|
10,688 |
|
|
|
11,971 |
|
|
|
10,670 |
|
|
|
10,403 |
|
|
|
10,346 |
|
|
|
10,534 |
|
|
|
10,901 |
|
|
|
9,722 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$ |
6,961 |
|
|
$ |
6,643 |
|
|
$ |
7,076 |
|
|
$ |
7,031 |
|
|
$ |
6,478 |
|
|
$ |
6,591 |
|
|
$ |
6,766 |
|
|
$ |
6,728 |
|
|
Income tax expense
|
|
|
2,021 |
|
|
|
2,077 |
|
|
|
2,275 |
|
|
|
2,266 |
|
|
|
1,809 |
|
|
|
1,955 |
|
|
|
2,182 |
|
|
|
2,182 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$ |
4,940 |
|
|
$ |
4,566 |
|
|
$ |
4,801 |
|
|
$ |
4,765 |
|
|
$ |
4,669 |
|
|
$ |
4,636 |
|
|
$ |
4,584 |
|
|
$ |
4,546 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$ |
.49 |
|
|
$ |
.46 |
|
|
$ |
.48 |
|
|
$ |
.48 |
|
|
$ |
.47 |
|
|
$ |
.47 |
|
|
$ |
.47 |
|
|
$ |
.46 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
The above quarterly financial information contains all normal
and recurring reclassifications for a fair and consistent
presentation.
Impact of Pending Accounting Standards
In November 2003, The FASB ratified a consensus reached by the
Emerging Issues Task Force (“EITF”) in EITF 03-1,
“The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments,” which was originally
effective for fiscal years ending after December 15, 2003.
The consensus requires certain quantitative and qualitative
disclosures for debt and marketable equity securities classified
as available-for-sale or held-to-maturity under SFAS
No. 115, “Accounting for Certain Investments in Debt
and Equity Securities” for which an other-than-temporary
impairment has not been recognized. These disclosures are
contained in Note 3 of Item 8 of this Form 10-K. In
March 2004, the FASB ratified guidance for evaluating whether or
not an impairment should be considered other-than-temporary,
therefore requiring an adjustment to earnings effective for
periods ending after June 15, 2004. In September 2004, the
FASB delayed the requirement to record impairment losses under
EITF 03-1 until such time as new guidance is issued and comes
into effect. Currently, the disclosure requirements originally
prescribed by EITF 03-1 will remain in effect.
In March 2004, the SEC released Staff Accounting Bulletin
No. 105, “Application of Accounting Principles to Loan
Commitments” (SAB No. 105), which summarizes the
application of accounting principles generally accepted in the
United States of America to loan commitments accounted for as
derivative instruments. Specifically, SAB No. 105 addresses
the Company entering into any commitments to extend a mortgage
loan at a specified rate while intending to sell the mortgage
loan after it is funded. SAB No. 105 is effective for loan
commitments accounted for as derivatives and entered into after
March 31, 2004. The Company adopted SAB No. 105 as of
April 1, 2004 with no material effect on the consolidated
financial statements.
In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123 (revised 2004) (“SFAS
No. 123R”), “Share-Based Payment” which
required companies to recognize in the income statement the
grant-date fair value of stock options and other equity-based
compensation issued to employees (shares issued through the
Incentive Compensation Plan or the Employee Stock Purchase
Plan), but expresses no preference for a type of valuation
model. SFAS No. 123R also provides implementation guidance
and is effective for most public companies’ interim period
beginning after June 14, 2005 (the third quarter for
calendar-year-end companies). The Company will adopt SFAS
No. 123R on July 1, 2005.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain
forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as
amended. The Company intends such forward-looking statements to
be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform
Act of 1995, and this statement is included for purposes of
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 the provision
and reserve for loan losses; developments pertaining to the loan
fraud and condominium project at 60 W. Erie, Chicago, including
the strength of the Chicago luxury condominium for sale market;
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 regulatory approval and construction
buildout; 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
51
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.
ITEM 7A. Quantitative And
Qualitative Disclosures About Market Risks
See “Interest Rate Sensitivity” in Item 7 of this
document.
52
Item 8. Consolidated
Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$ |
34,273 |
|
|
$ |
46,308 |
|
|
Fed funds sold and interest-bearing deposits with banks
|
|
|
51,479 |
|
|
|
20,008 |
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
| |
Securities held-to-maturity, at amortized cost (fair value of
$35,525 and $13,742 in 2004 and 2003, respectively)
|
|
|
35,469 |
|
|
|
13,426 |
|
| |
Securities available-for-sale, at fair value
|
|
|
805,608 |
|
|
|
770,045 |
|
| |
|
|
|
|
|
|
| |
|
Total investment securities
|
|
|
841,077 |
|
|
|
783,471 |
|
|
Loans, net of unearned discount
|
|
|
1,071,655 |
|
|
|
915,678 |
|
|
Less-allowance for loan losses
|
|
|
(8,546 |
) |
|
|
(8,369 |
) |
| |
|
|
|
|
|
|
| |
Net loans
|
|
|
1,063,109 |
|
|
|
907,309 |
|
|
Other real estate owned
|
|
|
9,857 |
|
|
|
16,130 |
|
|
Premises and equipment, net
|
|
|
34,561 |
|
|
|
33,461 |
|
|
Bank owned life insurance
|
|
|
24,858 |
|
|
|
21,011 |
|
|
Other assets
|
|
|
23,310 |
|
|
|
20,117 |
|
| |
|
|
|
|
|
|
|
Total Assets
|
|
$ |
2,082,524 |
|
|
$ |
1,847,815 |
|
| |
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits
|
|
$ |
265,251 |
|
|
$ |
250,101 |
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
| |
Savings deposits and NOW accounts
|
|
|
291,028 |
|
|
|
275,075 |
|
| |
Money market accounts
|
|
|
166,777 |
|
|
|
123,222 |
|
| |
Time deposits:
|
|
|
|
|
|
|
|
|
| |
|
Under $100,000
|
|
|
376,841 |
|
|
|
357,775 |
|
| |
|
$100,000 and over
|
|
|
614,639 |
|
|
|
452,329 |
|
| |
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
1,449,285 |
|
|
|
1,208,401 |
|
| |
|
|
|
|
|
|
|
Total deposits
|
|
|
1,714,536 |
|
|
|
1,458,502 |
|
|
Fed funds purchased and securities sold under agreements to
repurchase
|
|
|
25,285 |
|
|
|
54,487 |
|
|
Treasury, tax and loan demand notes
|
|
|
7,792 |
|
|
|
15,423 |
|
|
Federal Home Loan Bank of Chicago borrowings
|
|
|
161,418 |
|
|
|
161,500 |
|
|
Junior subordinated notes issued to capital trusts
|
|
|
23,713 |
|
|
|
- |
|
|
Trust Preferred Capital Securities
|
|
|
- |
|
|
|
23,000 |
|
|
Other liabilities
|
|
|
15,993 |
|
|
|
14,011 |
|
| |
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,948,737 |
|
|
|
1,726,923 |
|
|
Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
Preferred Stock, no par value, authorized— 100,000 shares,
issued— none
|
|
|
— |
|
|
|
— |
|
|
Common Stock, $2 par value, authorized—16,000,000 shares in
2004 and 2003, issued— 10,924,868 shares in 2004 and 2003,
outstanding— 9,820,811 shares in 2004 and 9,680,711 shares
in 2003
|
|
|
21,850 |
|
|
|
21,850 |
|
|
Surplus
|
|
|
7,751 |
|
|
|
5,765 |
|
|
Accumulated other comprehensive income, net of tax
|
|
|
432 |
|
|
|
1,463 |
|
|
Retained earnings
|
|
|
114,897 |
|
|
|
102,062 |
|
|
Less cost of shares in treasury, 1,104,057 common shares in 2004
and 1,244,157 common shares in 2003
|
|
|
(11,143 |
) |
|
|
(10,248 |
) |
| |
|
|
|
|
|
|
|
Total Shareholders’ Equity
|
|
|
133,787 |
|
|
|
120,892 |
|
| |
|
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity
|
|
$ |
2,082,524 |
|
|
$ |
1,847,815 |
|
| |
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
53
CONSOLIDATED STATEMENTS OF INCOME
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands | |
| |
|
except per share amounts) | |
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Loans
|
|
$ |
49,691 |
|
|
$ |
50,852 |
|
|
$ |
58,907 |
|
| |
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
U.S. Treasury and U.S. Government agencies
|
|
|
30,064 |
|
|
|
23,465 |
|
|
|
18,767 |
|
| |
|
State and municipal obligations
|
|
|
1,953 |
|
|
|
2,036 |
|
|
|
2,053 |
|
| |
|
Other securities
|
|
|
4,312 |
|
|
|
3,082 |
|
|
|
1,839 |
|
| |
Fed funds sold and interest-bearing deposits with banks
|
|
|
691 |
|
|
|
500 |
|
|
|
1,001 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
86,711 |
|
|
|
79,935 |
|
|
|
82,567 |
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Savings deposits and NOW accounts
|
|
|
3,149 |
|
|
|
2,163 |
|
|
|
1,710 |
|
| |
Money market accounts
|
|
|
1,811 |
|
|
|
1,534 |
|
|
|
3,062 |
|
| |
Time deposits
|
|
|
21,167 |
|
|
|
17,899 |
|
|
|
22,380 |
|
| |
Fed funds purchased and securities sold under agreements to
repurchase
|
|
|
403 |
|
|
|
797 |
|
|
|
1,411 |
|
| |
Treasury, tax and loan demand notes
|
|
|
47 |
|
|
|
32 |
|
|
|
185 |
|
| |
Federal Home Loan Bank of Chicago borrowings
|
|
|
5,197 |
|
|
|
5,051 |
|
|
|
5,390 |
|
| |
Junior subordinated notes issued to capital trusts
|
|
|
1,526 |
|
|
|
— |
|
|
|
— |
|
| |
Trust Preferred Capital Securities
|
|
|
— |
|
|
|
1,228 |
|
|
|
981 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
33,300 |
|
|
|
28,704 |
|
|
|
35,119 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
53,411 |
|
|
|
51,231 |
|
|
|
47,448 |
|
|
Provision for loan losses
|
|
|
500 |
|
|
|
1,600 |
|
|
|
14,650 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
52,911 |
|
|
|
49,631 |
|
|
|
32,798 |
|
| |
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Service charges on deposit accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Treasury management
|
|
|
4,499 |
|
|
|
5,601 |
|
|
|
6,162 |
|
| |
|
Retail and small business
|
|
|
1,272 |
|
|
|
1,259 |
|
|
|
1,214 |
|
| |
Investment management and trust fees
|
|
|
2,621 |
|
|
|
2,140 |
|
|
|
1,701 |
|
| |
Merchant credit card processing fees
|
|
|
5,978 |
|
|
|
4,849 |
|
|
|
4,813 |
|
| |
Gain on mortgages sold, net
|
|
|
242 |
|
|
|
1,004 |
|
|
|
814 |
|
| |
Income from bank owned life insurance
|
|
|
847 |
|
|
|
829 |
|
|
|
184 |
|
| |
Income from sale of covered call options
|
|
|
1,110 |
|
|
|
1,167 |
|
|
|
395 |
|
| |
Income from revenue sharing agreement
|
|
|
— |
|
|
|
— |
|
|
|
450 |
|
| |
Securities dealer income
|
|
|
224 |
|
|
|
64 |
|
|
|
— |
|
| |
Other operating income
|
|
|
1,398 |
|
|
|
1,305 |
|
|
|
1,403 |
|
| |
Investment securities gains, net
|
|
|
341 |
|
|
|
217 |
|
|
|
314 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
18,532 |
|
|
|
18,435 |
|
|
|
17,450 |
|
| |
|
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Salaries and employee benefits
|
|
|
23,959 |
|
|
|
23,346 |
|
|
|
19,610 |
|
| |
Occupancy expense
|
|
|
3,389 |
|
|
|
2,893 |
|
|
|
2,188 |
|
| |
Equipment expense
|
|
|
2,100 |
|
|
|
1,979 |
|
|
|
1,870 |
|
| |
Data processing
|
|
|
1,884 |
|
|
|
1,828 |
|
|
|
1,727 |
|
| |
Professional fees
|
|
|
931 |
|
|
|
1,309 |
|
|
|
1,766 |
|
| |
Postage, stationery and supplies
|
|
|
1,043 |
|
|
|
1,132 |
|
|
|
1,116 |
|
| |
Advertising and business development
|
|
|
2,102 |
|
|
|
1,778 |
|
|
|
1,641 |
|
| |
Merchant credit card interchange expense
|
|
|
4,824 |
|
|
|
3,799 |
|
|
|
3,717 |
|
| |
Provision for other real estate owned
|
|
|
1,217 |
|
|
|
1,415 |
|
|
|
— |
|
| |
Other operating expenses
|
|
|
2,283 |
|
|
|
2,024 |
|
|
|
2,106 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
43,732 |
|
|
|
41,503 |
|
|
|
35,741 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
27,711 |
|
|
|
26,563 |
|
|
|
14,507 |
|
|
Income tax expense
|
|
|
8,639 |
|
|
|
8,128 |
|
|
|
4,006 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
19,072 |
|
|
$ |
18,435 |
|
|
$ |
10,501 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$ |
1.95 |
|
|
$ |
1.92 |
|
|
$ |
1.10 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$ |
1.91 |
|
|
$ |
1.87 |
|
|
$ |
1.08 |
|
| |
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
54
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’
EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Common Stock | |
|
|
|
Accumulated | |
|
|
|
|
|
|
| |
|
| |
|
|
|
Other | |
|
|
|
|
|
Total | |
| |
|
|
|
Par | |
|
|
|
Comprehensive | |
|
Retained | |
|
Treasury | |
|
Shareholders’ | |
| |
|
Shares | |
|
Value | |
|
Surplus | |
|
Income | |
|
Earnings | |
|
Stock | |
|
Equity | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands except share amounts) | |
|
Balance at December 31, 2001
|
|
|
10,924,868 |
|
|
$ |
21,850 |
|
|
$ |
4,595 |
|
|
$ |
3,437 |
|
|
$ |
81,336 |
|
|
$ |
(11,666 |
) |
|
$ |
99,552 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,501 |
|
|
|
|
|
|
|
10,501 |
|
| |
Unrealized holding gain during the year of $5,293, net of
reclassification adjustment for realized gain included in net
income of $207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,086 |
|
|
|
|
|
|
|
|
|
|
|
5,086 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,587 |
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,463 |
) |
|
|
|
|
|
|
(3,463 |
) |
|
Issuance of notes receivable on exercised options
|
|
|
|
|
|
|
|
|
|
|
(300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(300 |
) |
|
Reissuance of treasury stock
|
|
|
|
|
|
|
|
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
41 |
|
|
|
102 |
|
|
Exercise of stock options (including tax benefit and share
repurchases)
|
|
|
|
|
|
|
|
|
|
|
230 |
|
|
|
|
|
|
|
|
|
|
|
234 |
|
|
|
464 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
10,924,868 |
|
|
$ |
21,850 |
|
|
$ |
4,586 |
|
|
$ |
8,523 |
|
|
$ |
88,374 |
|
|
$ |
(11,391 |
) |
|
$ |
111,942 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,435 |
|
|
|
|
|
|
|
18,435 |
|
| |
Unrealized holding loss during the year of $6,919, plus
reclassification adjustment for realized gain included in net
income of $141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,060 |
) |
|
|
|
|
|
|
|
|
|
|
(7,060 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,375 |
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,747 |
) |
|
|
|
|
|
|
(4,747 |
) |
|
Payment of note receivable on exercised options
|
|
|
|
|
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
|
|
Reissuance of treasury stock
|
|
|
|
|
|
|
|
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
88 |
|
|
|
211 |
|
|
Exercise of stock options (including tax benefit and share
repurchases)
|
|
|
|
|
|
|
|
|
|
|
956 |
|
|
|
|
|
|
|
|
|
|
|
1,204 |
|
|
|
2,160 |
|
|
Purchase of treasury stock (7,500 common shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(149 |
) |
|
|
(149 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
10,924,868 |
|
|
$ |
21,850 |
|
|
$ |
5,765 |
|
|
$ |
1,463 |
|
|
$ |
102,062 |
|
|
$ |
(10,248 |
) |
|
$ |
120,892 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,072 |
|
|
|
|
|
|
|
19,072 |
|
| |
Unrealized holding loss during the year of $809, plus
reclassification adjustment for realized gain included in net
income of $222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,031 |
) |
|
|
|
|
|
|
|
|
|
|
(1,031 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,041 |
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,237 |
) |
|
|
|
|
|
|
(6,237 |
) |
|
Reissuance of treasury stock
|
|
|
|
|
|
|
|
|
|
|
177 |
|
|
|
|
|
|
|
|
|
|
|
86 |
|
|
|
263 |
|
|
Exercise of stock options (including tax benefit and share
repurchases)
|
|
|
|
|
|
|
|
|
|
|
1,809 |
|
|
|
|
|
|
|
|
|
|
|
(12 |
) |
|
|
1,797 |
|
|
Purchase of treasury stock (32,353 common shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(969 |
) |
|
|
(969 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
10,924,868 |
|
|
$ |
21,850 |
|
|
$ |
7,751 |
|
|
$ |
432 |
|
|
$ |
114,897 |
|
|
$ |
(11,143 |
) |
|
$ |
133,787 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
55
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
$ |
19,072 |
|
|
$ |
18,435 |
|
|
$ |
10,501 |
|
| |
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Depreciation and amortization
|
|
|
2,868 |
|
|
|
2,577 |
|
|
|
2,337 |
|
| |
|
Discount accretion
|
|
|
(759 |
) |
|
|
(818 |
) |
|
|
(511 |
) |
| |
|
Premium amortization
|
|
|
890 |
|
|
|
757 |
|
|
|
779 |
|
| |
|
Provision for loss on other real estate owned
|
|
|
1,217 |
|
|
|
1,415 |
|
|
|
— |
|
| |
|
Provision for loan losses
|
|
|
500 |
|
|
|
1,600 |
|
|
|
14,650 |
|
| |
|
Deferred taxes
|
|
|
54 |
|
|
|
183 |
|
|
|
631 |
|
| |
|
Investment securities gains, net
|
|
|
(341 |
) |
|
|
(217 |
) |
|
|
(314 |
) |
| |
|
(Gains) losses on sales of premises and equipment
|
|
|
(30 |
) |
|
|
(25 |
) |
|
|
5 |
|
| |
|
Trading securities transactions, net
|
|
|
4 |
|
|
|
— |
|
|
|
— |
|
| |
|
Origination of real estate loans for sale
|
|
|
(16,636 |
) |
|
|
(77,906 |
) |
|
|
(76,250 |
) |
| |
|
Proceeds from sales of real estate loans originated for sale
|
|
|
16,585 |
|
|
|
82,067 |
|
|
|
80,303 |
|
| |
|
Gain on sales of mortgage loans originated for sale
|
|
|
(282 |
) |
|
|
(1,481 |
) |
|
|
(1,280 |
) |
| |
|
Increase in cash surrender value of life insurance
|
|
|
(847 |
) |
|
|
(827 |
) |
|
|
(184 |
) |
| |
|
FHLB of Chicago stock dividends
|
|
|
(2,064 |
) |
|
|
(986 |
) |
|
|
(312 |
) |
| |
|
Decrease from revenue sharing agreement
|
|
|
— |
|
|
|
— |
|
|
|
(28 |
) |
| |
|
Increase in other assets
|
|
|
(3,492 |
) |
|
|
(230 |
) |
|
|
(1,699 |
) |
| |
|
Increase (decrease) in other liabilities
|
|
|
4,179 |
|
|
|
2,845 |
|
|
|
(3,395 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
20,918 |
|
|
|
27,389 |
|
|
|
25,233 |
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Purchases
|
|
|
(35,520 |
) |
|
|
(6,829 |
) |
|
|
(5,193 |
) |
| |
|
Proceeds from maturities, calls and paydowns
|
|
|
13,378 |
|
|
|
3,444 |
|
|
|
5,402 |
|
| |
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Purchases
|
|
|
(767,544 |
) |
|
|
(634,417 |
) |
|
|
(427,543 |
) |
| |
|
Proceeds from maturities, calls and paydowns
|
|
|
494,386 |
|
|
|
177,903 |
|
|
|
154,024 |
|
| |
|
Proceeds from sales
|
|
|
238,205 |
|
|
|
173,456 |
|
|
|
102,509 |
|
| |
Increase in loans
|
|
|
(156,478 |
) |
|
|
(7,653 |
) |
|
|
(17,560 |
) |
| |
Purchases of premises and equipment, net of disposals
|
|
|
(3,912 |
) |
|
|
(9,463 |
) |
|
|
(5,393 |
) |
| |
Investment in bank owned life insurance
|
|
|
(3,000 |
) |
|
|
(5,000 |
) |
|
|
(15,000 |
) |
| |
Proceeds from sales of other real estate owned, net
|
|
|
7,538 |
|
|
|
2,534 |
|
|
|
— |
|
| |
Additional capitalized costs of other real estate owned
|
|
|
(2,386 |
) |
|
|
(12,135 |
) |
|
|
(4,338 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(215,333 |
) |
|
|
(318,160 |
) |
|
|
(213,092 |
) |
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Increase in noninterest-bearing demand deposits
|
|
|
15,150 |
|
|
|
2,295 |
|
|
|
35,867 |
|
| |
Increase in interest-bearing deposit accounts
|
|
|
240,884 |
|
|
|
191,476 |
|
|
|
150,898 |
|
| |
Decrease in short-term borrowing obligations
|
|
|
(36,833 |
) |
|
|
(14,727 |
) |
|
|
(17,376 |
) |
| |
Proceeds from FHLB of Chicago borrowings
|
|
|
20,920 |
|
|
|
85,000 |
|
|
|
21,000 |
|
| |
Repayment of FHLB of Chicago borrowings
|
|
|
(21,002 |
) |
|
|
(25,500 |
) |
|
|
(5,000 |
) |
| |
Proceeds from Trust Preferred Capital Securities
|
|
|
— |
|
|
|
5,000 |
|
|
|
12,000 |
|
| |
Purchase of treasury stock
|
|
|
(969 |
) |
|
|
(149 |
) |
|
|
— |
|
| |
Exercise of stock options, net
|
|
|
76 |
|
|
|
1,169 |
|
|
|
399 |
|
| |
Payment (issuance) of notes receivable on exercised options
|
|
|
— |
|
|
|
100 |
|
|
|
(300 |
) |
| |
Issuance of common stock for employee stock purchase plan
|
|
|
251 |
|
|
|
211 |
|
|
|
102 |
|
| |
Cash dividends
|
|
|
(6,027 |
) |
|
|
(4,298 |
) |
|
|
(3,319 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
212,450 |
|
|
|
240,577 |
|
|
|
194,271 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
18,035 |
|
|
|
(50,194 |
) |
|
|
6,412 |
|
|
Cash and cash equivalents at beginning of year
|
|
|
66,316 |
|
|
|
116,510 |
|
|
|
110,098 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
84,351 |
|
|
$ |
66,316 |
|
|
$ |
116,510 |
|
| |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest paid
|
|
$ |
29,705 |
|
|
$ |
33,399 |
|
|
$ |
40,097 |
|
| |
Income taxes paid
|
|
|
7,825 |
|
|
|
7,300 |
|
|
|
5,000 |
|
| |
Transfer of loans to other real estate owned
|
|
|
96 |
|
|
|
— |
|
|
|
3,606 |
|
| |
Transfer of auto loans to repossessed autos
|
|
|
415 |
|
|
|
794 |
|
|
|
1,464 |
|
See accompanying notes to consolidated financial statements.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
| Note 1. |
Summary of Significant Accounting Policies |
Principles of Consolidation: The consolidated financial
statements include the accounts of First Oak Brook Bancshares,
Inc. (the “Company”) and its wholly-owned
subsidiaries, Oak Brook Bank (the “Bank”) and First
Oak Brook Capital Markets, Inc (“FOBCM”). Also
included are the accounts of Oak Real Estate Development
Corporation, West Erie, LLC, and OBB Real Estate Holdings, LLC,
all of which are wholly-owned subsidiaries of the Bank. All
intercompany accounts and transactions have been eliminated in
consolidation. The accounting and reporting policies of the
Company and its subsidiaries conform to accounting principles
generally accepted in the United States of America and to
general practice within the banking industry. The consolidated
financial statements for 2003 also included three wholly-owned
statutory trust subsidiaries of the Company. On January 1,
2004, upon adoption of FIN No. 46R, the Company
deconsolidated the three statutory trust subsidiaries. See Note
8 to these consolidated financial statements for more
information.
Nature of Operations: The Company, through the Bank,
operates in a single line of business encompassing a 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 as well as an investment sales division.
Use of Estimates: The preparation of the consolidated
financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those
estimates.
Investment Securities: Securities are classified as
held-to-maturity, available-for-sale or trading at the time of
purchase. The majority of the Company’s securities are
classified as available-for-sale and stated at fair value, with
the unrealized gains and losses, net of tax, reported as a
separate component of shareholders’ equity. Securities are
classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost.
The Company purchases securities for trading purposes only
within the investment sales division. These securities are
typically purchased with the purpose of selling them in the near
term to a specified buyer. Trading securities are recorded at
fair value, with the unrealized gains and losses included in
earnings.
The amortized cost of securities classified as held-to-maturity
or available-for-sale is adjusted for amortization of premiums
and the accretion of discounts. Premiums are amortized to the
earlier of maturity or call date while discounts are accreted to
maturity. In the case of mortgage-backed securities, any premium
or discount is taken over the estimated life of the security.
Any remaining discount on a security that is called is
immediately accreted into income. The cost of a security sold is
based on the specific identification method.
The Company reviews the investment portfolio on a regular basis
for other than temporary security impairments. In the event a
specific security is determined to be other than temporarily
impaired, the Company will reduce the carrying value of that
security for the amount of the impairment.
Loans: Loans are carried at the principal amount
outstanding, net of unearned discount, including certain
deferred loan origination fees and net of deferred loan
origination costs. Residential real estate loans that are
originated for sale are carried at lower of aggregate cost or
market and are typically sold within 60 days. Interest
income on loans is accrued based on principal amounts
outstanding.
Loan Fees and Related Costs: Loan origination and
commitment fees and certain direct loan origination costs are
deferred and accreted or amortized to earnings as an adjustment
of the related loan’s yield over the contractual life or
the estimated life of the loan using the level-yield method.
When a loan is paid in full prior
57
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
to maturity, any unamortized fees are recorded in interest
income at payoff. Fees, such as prepayment penalties and fees
assessed for unused commitments on lines, are recorded in
interest income when received.
Allowance for Loan Losses: The allowance for loan losses
is maintained at a level believed adequate by management to
absorb estimated probable loan losses. Management’s
periodic evaluation of the adequacy of the allowance is based on
the Company’s past loan loss experience, 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.
The Company’s charge-off policy varies with respect to the
category of and specific circumstances surrounding each loan
under consideration. The Company records commercial loan
charge-offs on the basis of management’s ongoing evaluation
of collectibility. Consumer loans are charged off at the earlier
of the time management can quantify a loss or when the loan
becomes 180 days past due. Indirect vehicle loans are
generally charged off within 120 days of being past due
with the exception of a pending insurance claim or the pending
resolution of a Chapter 13 bankruptcy payment plan.
The Company records specific valuation allowances on commercial,
commercial mortgage and construction loans when a loan is
considered to be impaired. A loan is impaired when, based on an
evaluation of current information and events, it is probable and
estimable that the Company will not be able to collect all
amounts due (principal and interest) pursuant to the original
contractual terms. The Company measures impairment based upon
the present value of expected future cash flows discounted at
the loan’s original effective interest rate or the fair
value of the collateral if the loan is collateral dependent.
Large groups of homogeneous loans, such as residential mortgage,
home equity, indirect vehicle and consumer loans, are
collectively evaluated for impairment and are not subject to
impaired loan disclosures. Interest income on impaired loans is
recognized using the cash basis method.
Commercial, syndicated and real estate loans are placed on
nonaccrual status when the collectibility of the contractual
principal or interest is deemed doubtful by management or when
the loan becomes 90 days or more past due and is not well
secured or in the process of collection.
Premises and Equipment: Premises, leasehold improvements
and equipment are stated at cost less accumulated depreciation
and amortization. For financial reporting purposes, depreciation
is charged to expense using the straight-line method over the
estimated useful life of the asset. Leasehold improvements are
amortized over a period not exceeding the term of the lease,
including renewal option periods.
Other Real Estate Owned: Other Real Estate Owned
(“OREO”) is initially recorded at the net realizable
value at the date title is obtained. Costs relating to
development and improvement of property are capitalized, whereas
costs relating to holding the property are expensed. Valuations
are periodically performed by management and a provision for
impairment is recorded through a charge to operations if the
carrying value of a property exceeds its net realizable value.
Brokered Deposits: The Company utilizes brokered deposits
as a liquidity and asset liability management tool in the normal
course of business. Upon issuance of brokered deposits, the
Company recognizes a deferred broker commission that reflects
the fees paid to brokers for raising the funds in the retail
market. The deferred broker commissions are amortized to
interest expense as an adjustment to the brokered deposit yield
over its contractual maturity.
Derivative Financial Instruments: The Company accounts
for derivative financial instruments according to Statement of
Financial Accounting Standard (SFAS) No. 133
“Accounting for Derivative Instruments and Related Hedging
Activities” and its related amendments. All derivatives are
recognized on the Balance Sheets at fair value, with changes in
fair value recorded through earnings or other comprehensive
income depending on whether certain hedge criteria are met.
58
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
Income Taxes: The Company and its subsidiaries file
consolidated income tax returns. The Bank provides for income
taxes on a separate return basis and remits to the Company
amounts determined to be currently payable. Under this method,
deferred tax assets and liabilities are determined based on
temporary differences between the recognition of income and
expenses for financial statement and income tax purposes. Such
differences are measured using the enacted tax rates and laws
that are applicable to periods in which the differences are
expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to
the amount expected to be realized.
Earnings Per Share: Basic earnings per share
(“EPS”) is computed by dividing net income by the
weighted average number of common shares outstanding for the
period. Diluted EPS is computed by dividing net income by the
weighted average number of common shares adjusted for the
dilutive effect of outstanding stock options.
Stock-Based Compensation: The Company accounts for its
stock-based compensation plans in accordance with Accounting
Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees” (APB 25). Under APB 25, if the
exercise price of the Company’s employee stock options
equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. See Note 14 to
these consolidated financial statements for more information.
Comprehensive Income: Comprehensive income consists of
net income and the change in net unrealized gains
(losses) on available-for-sale securities and is presented
in the Consolidated Statements of Changes in Shareholders’
Equity.
Cash and Cash Equivalents: For purposes of the
Consolidated Statements of Cash Flows, cash and cash equivalents
include cash and due from banks, Fed funds sold and
interest-bearing deposits with banks with original maturities of
90 days or less.
Reclassifications: Certain amounts in the 2003 and 2002
consolidated financial statements have been reclassified to
conform to their 2004 presentation. All share and per share data
for 2002 has been restated to give effect to the three-for-two
stock split effective in August 2003.
New Accounting Standards: In 2003, the FASB issued SFAS
No. 150, “Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity”
(“SFAS No. 150”) which requires that certain
financial instruments be classified as a liability in the
Balance Sheet as the instrument embodies an obligation of the
issuing company. SFAS No. 150 also clarifies which classes
of financial instruments are applicable to the requirements of
this statement. The Company adopted SFAS No. 150 on
July 1, 2003 with no impact on the Company’s results
of operations, financial position or cash flows.
In 2003, the FASB issued Interpretation No. 46,
“Consolidation of Variable Interest Entities”
(“FIN No. 46”) which provides new accounting
guidance on when to consolidate a variable interest entity. A
variable interest entity exists when either the total equity
investment at risk is not sufficient to permit the entity to
finance its activities by itself, or the equity investors lack
one of three characteristics associated with owning a
controlling financial interest. Those characteristics include
the direct or indirect ability to make decisions about an
entity’s activities through voting rights or similar
rights, the obligation to absorb the expected losses of an
entity if they occur, and the right to receive the expected
residual returns of the entity if they occur. The accounting
requirements of FIN No. 46 were effective for the Company
on December 31, 2003, on a prospective basis. The impact of
adoption did not have an impact on the consolidated financial
statements of the Company.
In 2003, the FASB issued Interpretation No. 46 (revised),
“Consolidation of Variable Interest Entities”
(“FIN No. 46R”), which provides further guidance
on the accounting for variable interest entities. FIN
No. 46R replaces FIN No. 46, which was issued earlier
in 2003. As permitted by FIN No. 46R, the Company adopted
the provisions of FIN No. 46R as of January 1, 2004.
The adoption of FIN No. 46R resulted in the deconsolidation
of the three statutory trust subsidiaries that issued Common
Stock to the Company and junior subordinated notes of the
company. As a result of the deconsolidation of those trusts, at
December 31, 2004,
59
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
the Company has reported $23.713 million of junior
subordinated notes issued to capital trusts on the balance sheet
in lieu of the Trust Preferred Capital Securities issued by the
capital trusts which totaled $23.0 million at
December 31, 2003. See Note 8 to these consolidated
financial statements for more information.
In November 2003, the FASB ratified a consensus reached by the
Emerging Issues Task Force (“EITF”) in EITF 03-1,
“The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments,” which was originally
effective for fiscal years ending after December 15, 2003.
The consensus requires certain quantitative and qualitative
disclosures for debt and marketable equity securities classified
as available-for-sale or held-to-maturity under SFAS
No. 115, “Accounting for Certain Investments in Debt
and Equity Securities” for which an other-than-temporary
impairment has not been recognized. These disclosures are
contained in Note 3 to these consolidated financial
statements. In March 2004, the FASB ratified guidance for
evaluating whether or not an impairment should be considered
other-than-temporary, therefore requiring an adjustment to
earnings effective for periods ending after June 15, 2004.
In September 2004, the FASB delayed the requirement to record
impairment losses under EITF 03-1 until such time as new
guidance is issued and comes into effect. Currently, the
disclosure requirements originally prescribed by EITF 03-1 will
remain in effect.
In March 2004, the SEC released Staff Accounting Bulletin
No. 105, “Application of Accounting Principles to Loan
Commitments” (SAB No. 105), which summarizes the
application of accounting principles generally accepted in the
United States of America to loan commitments accounted for as
derivative instruments. Specifically, SAB No. 105 addresses
the Company entering into any commitments to extend a mortgage
loan at a specified rate while intending to sell the mortgage
loan after it is funded. SAB No. 105 is effective for loan
commitments accounted for as derivatives and entered into after
March 31, 2004. The Company adopted SAB No. 105 as of
April 1, 2004 with no material effect on the consolidated
financial statements.
In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123 (revised 2004) (“SFAS
No. 123R”), “Share-Based Payment” which
requires companies to recognize in the income statement the
grant-date fair value of equity-based compensation issued to
employees (shares issued through the Incentive Compensation Plan
or the Employee Stock Purchase Plan), but expresses no
preference for a type of valuation model. SFAS No. 123R
also provides implementation guidance and is effective for most
public companies’ interim period beginning after
June 14, 2005 (the third quarter for calendar year-end
companies). The Company will adopt SFAS No. 123R on
July 1, 2005 which will result in an increase in
compensation expense. See Note 14 to these consolidated
financial statements for more information.
|
|
| Note 2. |
Cash and Due from Banks |
Cash and due from banks include reserve balances that the Bank
is required to maintain in either vault cash or with the Federal
Reserve Bank of Chicago. These required reserves are based
principally on deposits outstanding. The average reserves
required for 2004 and 2003 were $3,170,000 and $3,830,000,
respectively.
60
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
|
|
| Note 3. |
Investment Securities |
The aggregate amortized cost and fair value of securities, and
gross unrealized gains and losses at December 31 follow:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
|
| |
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
U.S. Treasury
|
|
$ |
20,525 |
|
|
$ |
— |
|
|
$ |
(424 |
) |
|
$ |
20,101 |
|
| |
|
U.S. Government agencies
|
|
|
674,191 |
|
|
|
1,533 |
|
|
|
(2,497 |
) |
|
|
673,227 |
|
| |
|
Agency mortgage-backed securities
|
|
|
29,837 |
|
|
|
139 |
|
|
|
(29 |
) |
|
|
29,947 |
|
| |
|
State and municipal obligations
|
|
|
23,193 |
|
|
|
837 |
|
|
|
(126 |
) |
|
|
23,904 |
|
| |
|
Corporate and other
securities(1)
|
|
|
57,198 |
|
|
|
1,848 |
|
|
|
(617 |
) |
|
|
58,429 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total securities available-for-sale
|
|
$ |
804,944 |
|
|
$ |
4,357 |
|
|
$ |
(3,693 |
) |
|
$ |
805,608 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Agency mortgage-backed securities
|
|
$ |
15,176 |
|
|
$ |
— |
|
|
$ |
(22 |
) |
|
$ |
15,154 |
|
| |
|
State and municipal obligations
|
|
|
19,793 |
|
|
|
275 |
|
|
|
(197 |
) |
|
|
19,871 |
|
| |
|
Corporate and other
securities(1)
|
|
|
500 |
|
|
|
— |
|
|
|
— |
|
|
|
500 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total securities held-to-maturity
|
|
$ |
35,469 |
|
|
$ |
275 |
|
|
$ |
(219 |
) |
|
$ |
35,525 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
U.S. Treasury
|
|
$ |
63,658 |
|
|
$ |
88 |
|
|
$ |
(2,001 |
) |
|
$ |
61,745 |
|
| |
|
U.S. Government agencies
|
|
|
557,357 |
|
|
|
5,996 |
|
|
|
(4,852 |
) |
|
|
558,501 |
|
| |
|
Agency mortgage-backed securities
|
|
|
47,392 |
|
|
|
103 |
|
|
|
(140 |
) |
|
|
47,355 |
|
| |
|
Agency collateralized mortgage obligations
|
|
|
173 |
|
|
|
17 |
|
|
|
— |
|
|
|
190 |
|
| |
|
State and municipal obligations
|
|
|
26,679 |
|
|
|
1,352 |
|
|
|
(160 |
) |
|
|
27,871 |
|
| |
|
Corporate and other
securities(1)
|
|
|
72,361 |
|
|
|
2,082 |
|
|
|
(60 |
) |
|
|
74,383 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total securities available-for-sale
|
|
$ |
767,620 |
|
|
$ |
9,638 |
|
|
$ |
(7,213 |
) |
|
$ |
770,045 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Agency mortgage-backed securities
|
|
$ |
29 |
|
|
$ |
2 |
|
|
$ |
— |
|
|
$ |
31 |
|
| |
|
State and municipal obligations
|
|
|
12,897 |
|
|
|
377 |
|
|
|
(63 |
) |
|
|
13,211 |
|
| |
|
Corporate and other
securities(1)
|
|
|
500 |
|
|
|
— |
|
|
|
— |
|
|
|
500 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total securities held-to-maturity
|
|
$ |
13,426 |
|
|
$ |
379 |
|
|
$ |
(63 |
) |
|
$ |
13,742 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Corporate and other securities include Trust Preferred Capital
Securities (“TRUPS”), FHLB of Chicago stock, FNMA
perpetual preferred stock, corporate debt and equity securities,
foreign bonds and money market funds. |
The Company held no securities classified as trading at
December 31, 2004 or 2003.
The unrealized losses by investment type at December 31,
2004 are shown below. The investment securities are shown at
their fair value (rather than carrying value) and segregated by
those securities that have been in an unrealized loss position
for less than twelve months and those securities that have been
in an unrealized loss position for twelve months or more.
61
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less than 12 months | |
|
12 months or longer | |
|
Total | |
| |
|
| |
|
| |
|
| |
| |
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
| |
|
Value | |
|
Losses | |
|
Value | |
|
Losses | |
|
Value | |
|
Losses | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
U.S. Treasury
|
|
$ |
20,101 |
|
|
$ |
(424 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
20,101 |
|
|
$ |
(424 |
) |
|
U.S. Government agencies
|
|
|
244,514 |
|
|
|
(1,200 |
) |
|
|
39,171 |
|
|
|
(1,297 |
) |
|
|
283,685 |
|
|
|
(2,497 |
) |
|
Agency mortgage-backed securities
|
|
|
24,080 |
|
|
|
(24 |
) |
|
|
143 |
|
|
|
(27 |
) |
|
|
24,223 |
|
|
|
(51 |
) |
|
State and municipal obligations
|
|
|
14,040 |
|
|
|
(192 |
) |
|
|
2,184 |
|
|
|
(131 |
) |
|
|
16,224 |
|
|
|
(323 |
) |
|
Corporate and other securities
|
|
|
6,599 |
|
|
|
(617 |
) |
|
|
— |
|
|
|
— |
|
|
|
6,599 |
|
|
|
(617 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$ |
309,334 |
|
|
$ |
(2,457 |
) |
|
$ |
41,498 |
|
|
$ |
(1,455 |
) |
|
$ |
350,832 |
|
|
$ |
(3,912 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004, gross unrealized losses for the
investment portfolio totaled $3,912,000, consisting of
94 securities. Of these securities, three are U.S. Treasury
securities, 32 are U.S. Government agencies (including
mortgage-backed securities), 56 are state and municipal
obligations, and three are corporate and other securities. The
unrealized loss positions are primarily the result of the low
interest-rate environment experienced during 2004 and not the
result of credit deterioration. The investment portfolio is
reviewed by management on a regular basis for other than
temporary security impairments. In the event the unrealized loss
position is determined to be other than temporary, management
reduces the carrying value of the security for the amount of the
impairment. At December 31, 2004, management asserts that
all unrealized losses are temporary in nature and no reduction
in carrying value is deemed necessary.
The amortized cost and fair value of investment securities at
December 31, 2004, by contractual maturity, are shown
below. Agency mortgage-backed securities and collateralized
mortgage obligations are presented in the table based on their
estimated average lives, which will differ from contractual
maturities due to principal prepayments. Actual maturities of
the securities may differ from that reflected in the table due
to securities with call features. Such securities are assumed to
be held to contractual maturity for maturity distribution
purposes.
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
| |
|
| |
| |
|
Amortized | |
|
|
| |
|
Cost | |
|
Fair Value | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
| |
Due in one year or less
|
|
$ |
9,452 |
|
|
$ |
9,565 |
|
| |
Due after one year through five years
|
|
|
281,395 |
|
|
|
281,844 |
|
| |
Due after five years through ten years
|
|
|
460,589 |
|
|
|
459,508 |
|
| |
Due in over ten years
|
|
|
23,952 |
|
|
|
25,653 |
|
| |
Other securities with no stated maturity
date(1)
|
|
|
29,556 |
|
|
|
29,038 |
|
| |
|
|
|
|
|
|
| |
|
$ |
804,944 |
|
|
$ |
805,608 |
|
| |
|
|
|
|
|
|
|
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
| |
Due in one year or less
|
|
$ |
3,836 |
|
|
$ |
3,835 |
|
| |
Due after one year through five years
|
|
|
25,630 |
|
|
|
25,749 |
|
| |
Due after five years through ten years
|
|
|
5,954 |
|
|
|
5,890 |
|
| |
Due in over ten years
|
|
|
49 |
|
|
|
51 |
|
| |
|
|
|
|
|
|
| |
|
$ |
35,469 |
|
|
$ |
35,525 |
|
| |
|
|
|
|
|
|
|
|
| (1) |
Includes FHLB of Chicago stock, FNMA perpetual preferred stock,
equity securities and money market funds, which have no stated
maturity. |
62
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
At December 31, 2004, investment securities with a carrying
value of $733,822,000 were pledged as collateral to secure
certain deposits, securities sold under agreements to repurchase
and FHLB of Chicago borrowings.
Proceeds from sales of available-for-sale investments in debt
and equity securities during 2004, 2003 and 2002 were
$238,205,000, $173,456,000 and $102,509,000, respectively. Gross
gains of $3,078,000 and gross losses of $2,757,000 were realized
on the sale of those available-for-sale securities in 2004.
Gross gains of $4,000 were realized on proceeds of $1,657,000
from sales of trading securities in 2004. Gross gains of $16,000
were realized on proceeds of $25,709,000 from available-for-sale
securities that were called at a premium. Gross gains of
$821,000 and gross losses of $604,000 were realized in 2003.
Gross gains of $547,000 and gross losses of $233,000 were
realized in 2002.
Periodically, the Company will sell options to securities
dealers for the dealers’ right to purchase certain U.S.
Treasury or U.S. Government agency securities held within the
investment portfolio. These transactions are designed primarily
as yield enhancements to increase the total return associated
with holding the securities as earning assets. The option
premium income generated by these transactions is recognized as
other noninterest income when received. There were no call
options outstanding at December 31, 2004 or 2003.
Loans outstanding at December 31 follow:
| |
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Commercial
|
|
$ |
116,653 |
|
|
$ |
95,761 |
|
|
Syndicated
|
|
|
34,958 |
|
|
|
33,088 |
|
|
Real estate—
|
|
|
|
|
|
|
|
|
| |
Construction, land acquisition and development
|
|
|
75,833 |
|
|
|
40,493 |
|
| |
Commercial mortgage
|
|
|
247,840 |
|
|
|
234,967 |
|
| |
Residential mortgage
|
|
|
109,097 |
|
|
|
101,133 |
|
| |
Home equity
|
|
|
151,873 |
|
|
|
139,926 |
|
|
Indirect vehicle—
|
|
|
|
|
|
|
|
|
| |
Auto
|
|
|
276,398 |
|
|
|
226,866 |
|
| |
Harley Davidson motorcycle
|
|
|
51,560 |
|
|
|
35,957 |
|
|
Consumer
|
|
|
7,443 |
|
|
|
7,487 |
|
| |
|
|
|
|
|
|
| |
Total loans, net of unearned discount
|
|
$ |
1,071,655 |
|
|
$ |
915,678 |
|
| |
|
|
|
|
|
|
The balance of residential mortgage loans includes loans held
for sale of $629,000 and $296,000, at December 31, 2004 and
2003, respectively. These loans are typically sold with
servicing released within 60 days of origination.
An analysis of the allowance for loan losses follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Balance at beginning of year
|
|
$ |
8,369 |
|
|
$ |
7,351 |
|
|
$ |
6,982 |
|
|
Provision for loan losses
|
|
|
500 |
|
|
|
1,600 |
|
|
|
14,650 |
|
|
Recoveries
|
|
|
360 |
|
|
|
724 |
|
|
|
230 |
|
|
Charge-offs
|
|
|
(683 |
) |
|
|
(1,306 |
) |
|
|
(14,511 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$ |
8,546 |
|
|
$ |
8,369 |
|
|
$ |
7,351 |
|
| |
|
|
|
|
|
|
|
|
|
63
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
The Company has no nonaccrual loans at December 31, 2004.
At December 31, 2003, the Company had $293,000 of
nonaccrual loans. None of the nonaccrual loans were considered
impaired at December 31, 2003. The average balance of
impaired loans was zero, $189,000 and $8,794,000 for 2004, 2003
and 2002, respectively. The average balance of impaired loans
during 2002 includes a loan on a construction property charged
off during 2002 that is now carried as OREO (See Note 6 to these
consolidated financial statements for additional information).
The Company did not recognize any interest income associated
with impaired loans while the loans were considered impaired
during 2004, 2003 or 2002. If interest had been accrued at its
original rate, such income would have approximated zero in 2004,
$55,000 in 2003 and $1,043,000 in 2002.
|
|
| Note 5. |
Premises and Equipment |
A summary of premises and equipment at December 31 follows:
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Land
|
|
$ |
8,861 |
|
|
$ |
6,872 |
|
|
Buildings and improvements
|
|
|
31,054 |
|
|
|
30,373 |
|
|
Leasehold improvements
|
|
|
1,442 |
|
|
|
1,429 |
|
|
Data processing equipment, office equipment and furniture
|
|
|
17,584 |
|
|
|
19,121 |
|
| |
|
|
|
|
|
|
| |
|
|
58,941 |
|
|
|
57,795 |
|
|
Less accumulated depreciation and amortization
|
|
|
(24,380 |
) |
|
|
(24,334 |
) |
| |
|
|
|
|
|
|
|
Premises and equipment, net
|
|
$ |
34,561 |
|
|
$ |
33,461 |
|
| |
|
|
|
|
|
|
The Company has entered into a number of non-cancelable
operating lease agreements for certain of the Bank’s office
premises. The minimum annual net rental commitments under these
leases, which extend until 2013, are as follows:
| |
|
|
|
|
| |
|
(Dollars in thousands) | |
| |
|
| |
|
2005
|
|
$ |
469 |
|
|
2006
|
|
|
498 |
|
|
2007
|
|
|
487 |
|
|
2008
|
|
|
428 |
|
|
2009
|
|
|
399 |
|
|
2010 and thereafter
|
|
|
355 |
|
| |
|
|
|
| |
|
$ |
2,636 |
|
| |
|
|
|
Total rental expense for 2004, 2003, and 2002 was approximately
$568,000, $526,000 and $401,000 respectively, which included
payment of certain occupancy expenses as defined in the lease
agreements.
The Company’s aggregate future minimum net rental income to
be received under a non-cancelable lease from a third party
tenant which expires in 2006 is as follows:
| |
|
|
|
|
| |
|
(Dollars in thousands) | |
| |
|
| |
|
2005
|
|
$ |
186 |
|
|
2006
|
|
|
175 |
|
| |
|
|
|
| |
|
$ |
361 |
|
| |
|
|
|
The Company also receives reimbursement from its tenants for
certain occupancy expenses including taxes, insurance and
operational expenses, as defined in the lease agreements.
64
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
|
|
| Note 6. |
Other Real Estate Owned |
At December 31, 2004, the Company has two properties in
Other Real Estate Owned (“OREO”) totaling
$9.857 million. Substantially all of the balance consists
of the remaining unsold units and parking spaces of a
24 unit luxury condominium construction project with
53 deeded parking spaces. Construction of this property was
completed within budget during the first quarter of 2004.
Through December 31, 2004, 14 units and
32 parking spaces have been sold, closed, and occupied.
Title to the condominium property was acquired in November 2002
and recorded at its then net realizable value. The repayment of
the Bank’s investment in the project is dependent on the
strength of the Chicago luxury condominium market. In September
2004, the Company performed a market pricing analysis and, as a
result, reduced the prices of the remaining units. As a
consequence, the Company recorded a provision for loss on OREO
of $1,217,000. Through December 31, 2004, the Bank has
recorded a cumulative provision for loss on OREO of
approximately $2,632,000. At December 31, 2004, the
property is recorded at its net realizable value of
$9.761 million and management will continue to evaluate the
property quarterly for impairment and make additional valuation
adjustments as deemed necessary.
The second property in OREO is a commercial real estate property
located in Chicago Heights, Illinois. This property is recorded
at its net realizable value of $96,000.
As of December 31, 2004, the scheduled maturities of time
deposits are as follows:
| |
|
|
|
|
|
| |
|
(Dollars in thousands) | |
| |
|
| |
|
2005
|
|
$ |
785,798 |
|
|
2006
|
|
|
183,264 |
|
|
2007
|
|
|
14,349 |
|
|
2008
|
|
|
4,424 |
|
|
2009
|
|
|
3,629 |
|
|
2010 and thereafter
|
|
|
16 |
|
| |
|
|
|
| |
Total
|
|
$ |
991,480 |
|
| |
|
|
|
Included in the total balance are brokered time deposits of
$10,061,000 and $35,019,000 at December 31, 2004 and 2003,
respectively.
The Company’s borrowings at December 31, 2004 and 2003
consisted of short-term borrowings, FHLB of Chicago borrowings
and junior subordinated notes issued to capital trusts.
Short-term borrowings
Short-term borrowings consist of Fed funds purchased; securities
sold under agreements to repurchase and treasury, tax and loan
demand notes.
65
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
Information related to short-term borrowings at December 31
is summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Fed funds purchased
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Securities sold under agreements to repurchase
|
|
|
25,285 |
|
|
|
54,487 |
|
|
|
71,602 |
|
|
Treasury, tax and loan demand notes
|
|
|
7,792 |
|
|
|
15,423 |
|
|
|
13,035 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
33,077 |
|
|
$ |
69,910 |
|
|
$ |
84,637 |
|
| |
|
|
|
|
|
|
|
|
|
|
Average during the year
|
|
$ |
41,651 |
|
|
$ |
78,779 |
|
|
$ |
94,350 |
|
|
Maximum month-end balance
|
|
|
63,644 |
|
|
|
94,607 |
|
|
|
218,099 |
|
|
Average rate at year-end
|
|
|
1.73 |
% |
|
|
0.74 |
% |
|
|
1.35 |
% |
|
Average rate during the year
|
|
|
1.08 |
% |
|
|
1.05 |
% |
|
|
1.69 |
% |
At December 31, 2004, the Company did not have any Fed
funds purchased, however, from time to time during each year
presented, the Company did purchase Fed funds. These Fed funds
purchased generally represent one day borrowings obtained from
correspondent banks. The securities sold under agreements to
repurchase represent borrowings which generally have maturities
within one year and are secured by U.S. Treasury and U.S.
Government agency securities. The treasury, tax and loan demand
notes are generally repaid within 90 days from the
transaction date and are secured by municipal securities and
commercial loans.
The Company has a revolving line of credit arrangement with an
unaffiliated third party bank for $15 million which matures
on April 1, 2005 and is expected to be renewed annually.
The interest rate is determined at the time of each individual
draw as a floating rate tied to LIBOR. There was no outstanding
balance on this line at December 31, 2004 and 2003.
66
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
FHLB of Chicago
borrowings
FHLB of Chicago borrowings at December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| Maturity |
|
Amount | |
|
Rate | |
|
Amount | |
|
Rate | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
January 7, 2004
|
|
$ |
— |
|
|
|
— |
% |
|
$ |
6,000 |
|
|
|
5.49 |
% |
|
February 9, 2004
|
|
|
— |
|
|
|
— |
|
|
|
5,000 |
|
|
|
6.76 |
|
|
February 17, 2004
|
|
|
— |
|
|
|
— |
|
|
|
5,000 |
|
|
|
1.63 |
|
|
November 1, 2004
|
|
|
— |
|
|
|
— |
|
|
|
5,000 |
|
|
|
2.24 |
|
|
February 7, 2005
|
|
|
1,500 |
|
|
|
5.74 |
|
|
|
1,500 |
|
|
|
5.74 |
|
|
February 19, 2005
|
|
|
10,000 |
|
|
|
5.97 |
|
|
|
10,000 |
|
|
|
5.97 |
|
|
February 22, 2005
|
|
|
5,000 |
|
|
|
2.13 |
|
|
|
5,000 |
|
|
|
2.13 |
|
|
March 21,
2005(1)
|
|
|
5,000 |
|
|
|
6.53 |
|
|
|
5,000 |
|
|
|
6.53 |
|
|
March 21,
2005(1)
|
|
|
5,000 |
|
|
|
6.20 |
|
|
|
5,000 |
|
|
|
6.20 |
|
|
March 21, 2005
|
|
|
5,000 |
|
|
|
7.14 |
|
|
|
5,000 |
|
|
|
7.14 |
|
|
May 3, 2005
|
|
|
6,000 |
|
|
|
4.37 |
|
|
|
6,000 |
|
|
|
4.37 |
|
|
October 31, 2005
|
|
|
5,000 |
|
|
|
2.75 |
|
|
|
5,000 |
|
|
|
2.75 |
|
|
March 1, 2006
|
|
|
10,000 |
|
|
|
2.05 |
|
|
|
— |
|
|
|
— |
|
|
April 3, 2006
|
|
|
10,000 |
|
|
|
2.03 |
|
|
|
— |
|
|
|
— |
|
|
February 5, 2007
|
|
|
2,000 |
|
|
|
5.83 |
|
|
|
2,000 |
|
|
|
5.83 |
|
|
January 12, 2008
|
|
|
15,000 |
|
|
|
5.23 |
|
|
|
15,000 |
|
|
|
5.23 |
|
|
February 19, 2008
|
|
|
6,000 |
|
|
|
6.04 |
|
|
|
6,000 |
|
|
|
6.04 |
|
|
December 30,
2008(2)
|
|
|
75,000 |
|
|
|
2.67 |
|
|
|
75,000 |
|
|
|
1.29 |
|
|
November 2,
2009(3)
|
|
|
918 |
|
|
|
4.22 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total/ Average rate
|
|
$ |
161,418 |
|
|
|
3.65 |
% |
|
$ |
161,500 |
|
|
|
3.27 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Callable March 20, 2004 and quarterly thereafter until
maturity. |
| (2) |
Interest floats quarterly at 3-month LIBOR plus 12 basis
points. Prepayable without penalties. |
| (3) |
Advance requires amortizing principal payments monthly. |
With the exception of the borrowing due December 30, 2008,
these borrowings have a fixed interest rate for the term of the
debt and can be prepaid only if approved by the FHLB of Chicago
and may include a penalty assessment. Callable borrowings have
the potential to be called in whole or in part at the discretion
of the FHLB of Chicago.
The Bank has entered into a collateral pledge agreement whereby
the Bank has agreed to keep on hand, at all times, free of all
other pledges, liens, and encumbrances, a portfolio of
specifically listed first mortgage residential loans as
collateral for the outstanding borrowings from the FHLB of
Chicago. In addition, the Bank specifically pledged certain
multi-family loans and U.S. Government agency securities to the
FHLB of Chicago which increases the Company’s borrowing
capacity. All stock in the FHLB of Chicago, totaling $19,410,000
and $37,347,000 at December 31, 2004 and 2003,
respectively, is pledged as additional collateral for these
borrowings.
Junior subordinated notes
issued to capital trusts
The Company established three separate statutory trusts in 2003,
2002, and 2000 for the purpose of issuing, in aggregate,
$23 million of Trust Preferred Capital Securities
(“TRUPS”) as part of three separate pooled trust
preferred offerings distributed in institutional private
placements. The proceeds from such
67
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
issuances were used by the trusts to purchase junior
subordinated notes of the Company, which are the sole assets of
each trust. The Company wholly owns all of the common securities
of each trust which, in the aggregate, total $713,000.
In accordance with FIN No. 46R, these statutory trusts
qualify as variable interest entities for which the Company is
not the primary beneficiary and, therefore, are ineligible for
consolidation. Accordingly, the statutory trusts were
deconsolidated on January 1, 2004, and are now accounted
for using the equity method. The $23.713 million of junior
subordinated notes issued by the Company to the statutory trusts
are reflected in the Company’s December 31, 2004
consolidated balance sheet as “Junior subordinated notes
issued to capital trusts” in lieu of the $23 million
of TRUPS reported in the balance sheet at December 31,
2003. The equity in the common securities of $713,000 is
included in “Other assets” on the consolidated balance
sheet at December 31, 2004.
The table below summarizes the outstanding junior subordinated
notes and the related TRUPS issued by each trust as of
December 31, 2004 (dollars in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
FOBB Statutory | |
|
FOBB Statutory | |
|
FOBB Statutory | |
| |
|
Trust I | |
|
Trust II | |
|
Trust III | |
| |
|
| |
|
| |
|
| |
|
Junior Subordinated Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Principal balance
|
|
|
$6,186 |
|
|
|
$12,372 |
|
|
|
$5,155 |
|
| |
Stated maturity
|
|
|
September 2030 (1) |
|
|
|
June 2032(2) |
|
|
|
January 2034 (2) |
|
|
Trust Preferred Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Face value
|
|
|
$6,000 |
|
|
|
$12,000 |
|
|
|
$5,000 |
|
| |
Interest rate
|
|
|
10.6% |
|
|
90-day LIBOR plus 3.45% |
|
90-day LIBOR plus 2.80% |
| |
|
Issuance date
|
|
|
September 2000 |
|
|
|
June 2002 |
|
|
|
December 2003 |
|
|
Distribution date
|
|
|
Semi-annually |
|
|
|
Quarterly |
|
|
|
Quarterly |
|
|
|
| (1) |
Non-callable for ten years, after which the securities have a
declining ten year premium call. |
| (2) |
Non-callable for five years, after which callable at par. |
Note 9. Income Taxes
The components of income tax expense for the years ended
December 31 follow:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Current provision
|
|
$ |
8,585 |
|
|
$ |
7,945 |
|
|
$ |
3,375 |
|
|
Deferred provision
|
|
|
54 |
|
|
|
183 |
|
|
|
631 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$ |
8,639 |
|
|
$ |
8,128 |
|
|
$ |
4,006 |
|
| |
|
|
|
|
|
|
|
|
|
68
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
The net deferred tax assets at December 31 consisted of the
following:
| |
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in | |
| |
|
thousands) | |
|
Gross deferred tax assets:
|
|
|
|
|
|
|
|
|
| |
Book over tax loan loss reserve
|
|
$ |
2,991 |
|
|
$ |
2,929 |
|
| |
Other real estate owned loss reserve
|
|
|
627 |
|
|
|
— |
|
| |
Retirement plan
|
|
|
637 |
|
|
|
510 |
|
| |
Deferred compensation plans
|
|
|
1,275 |
|
|
|
922 |
|
| |
State net operating loss carryforward
|
|
|
896 |
|
|
|
237 |
|
| |
Other
|
|
|
36 |
|
|
|
20 |
|
| |
|
|
|
|
|
|
| |
|
Total gross deferred tax assets
|
|
|
6,462 |
|
|
|
4,618 |
|
| |
Less valuation allowance
|
|
|
(896 |
) |
|
|
(237 |
) |
| |
|
|
|
|
|
|
| |
|
Deferred tax assets
|
|
|
5,566 |
|
|
|
4,381 |
|
|
Gross deferred tax liabilities:
|
|
|
|
|
|
|
|
|
| |
Unrealized gains on securities available-for-sale
|
|
|
232 |
|
|
|
848 |
|
| |
Accretion of discount on securities
|
|
|
167 |
|
|
|
116 |
|
| |
Depreciation
|
|
|
1,308 |
|
|
|
899 |
|
| |
Book over tax basis of land
|
|
|
241 |
|
|
|
241 |
|
| |
FHLB of Chicago stock dividends
|
|
|
1,478 |
|
|
|
756 |
|
| |
Deferred loan costs
|
|
|
600 |
|
|
|
596 |
|
| |
Prepaid expenses
|
|
|
268 |
|
|
|
215 |
|
| |
|
|
|
|
|
|
| |
|
Total gross deferred tax liabilities
|
|
$ |
4,294 |
|
|
$ |
3,671 |
|
| |
|
|
|
|
|
|
| |
|
Net deferred tax asset
|
|
$ |
1,272 |
|
|
$ |
710 |
|
| |
|
|
|
|
|
|
At December 31, 2004, the Company has a state net operating
loss carry forward of approximately $18.9 million. Of this
amount, $315,000 will expire in 2015, $14,790,000 will expire in
2016, and $3,785,000 will expire in 2022. Realization of
deferred tax assets is dependent upon the generation of future
taxable income by the Company within the allowable net operating
carry forward period. In consideration of net losses incurred,
management has provided a valuation allowance to reduce the net
carrying value of deferred tax assets. The amount of this
valuation allowance is subject to adjustment by management in
future periods based upon its assessment of evidence supporting
the degree of probability that deferred tax assets will be
realized. At December 31, 2004, management believes that it
is more likely than not that the results of future operations
will generate sufficient taxable income to realize the deferred
tax assets net of the valuation allowance.
69
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
The effective tax rates for 2004, 2003, and 2002 were 31.2%,
30.6%, and 27.6%, respectively. Income tax expense was less than
the amount computed by applying the Federal statutory rate of
35% for 2004, 2003 and 2002 due to the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Tax expense at statutory rate
|
|
$ |
9,699 |
|
|
$ |
9,297 |
|
|
$ |
5,077 |
|
|
Decrease in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income from state and municipal obligations and certain loans
not subject to Federal income taxes
|
|
|
(588 |
) |
|
|
(624 |
) |
|
|
(675 |
) |
| |
Effect of marginal tax rate
|
|
|
— |
|
|
|
— |
|
|
|
(100 |
) |
| |
Bank owned life insurance
|
|
|
(296 |
) |
|
|
(290 |
) |
|
|
(64 |
) |
| |
Other miscellaneous, net
|
|
|
(176 |
) |
|
|
(255 |
) |
|
|
(232 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$ |
8,639 |
|
|
$ |
8,128 |
|
|
$ |
4,006 |
|
| |
|
|
|
|
|
|
|
|
|
Note 10. Shareholders’
Equity
At December 31, 2004, the Company has reserved for issuance
1,035,681 shares of Common Stock for the Incentive Compensation
Plan and 124,737 shares for the Employee Stock Purchase Plan.
Payment of dividends by the Bank is subject to both Federal and
state banking laws and regulations that limit the amount of
dividends that can be paid by the Bank without prior regulatory
approval. At December 31, 2004, $24,892,000 of
undistributed earnings was available for the payment of
dividends by the Bank without prior regulatory approval.
Note 11. Regulatory Capital
The Company and the Bank are subject to various regulatory
capital requirements administered by the Federal banking
agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct
material effect on the Company’s financial statements.
Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures
of assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital
amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings,
and other factors.
Regulations require the Company and the Bank to maintain minimum
amounts of total and Tier 1 capital, minimum ratios of
total and Tier 1 capital to risk-weighted assets, and a
minimum ratio of Tier 1 capital to average assets to ensure
capital adequacy. Management believes, as of December 31,
2004 and 2003, that the Company and the Bank met all capital
adequacy requirements to which they are subject.
As discussed in Note 8 to these consolidated financial
statements, the Company adopted FIN No. 46R which required
the deconsolidation of the three statutory trust subsidiaries
for financial statement presentation. The $23.713 million
of junior subordinated notes issued to capital trusts net of the
$713,000 equity in common securities of the statutory trusts is
included in the Tier 1 Capital calculation below. On
March 1, 2005, the Board of Governors of the Federal
Reserve System issued a final ruling on the inclusion of TRUPS
in their Tier 1 Capital calculation for regulatory capital
purposes. This rule reduces the allowable level of TRUPS for
purposes of calculating Tier 1 Capital to be 25% of core
capital elements net of goodwill and includes a phase out period
for the final five years prior to the TRUP maturity. Under the
new rules, the Company would still be considered “well
capitalized” as the current level of TRUPS will still be
within the new allowable limits.
70
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
The Company and the Bank’s actual capital amounts and
ratios are presented in the following table. As of
December 31, 2004 and 2003, the most recent regulatory
notification categorized the Bank as well capitalized. At
December 31, 2004, there are no conditions or events since
that notification that management believes have changed the
institution’s category.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Capital Required To Be | |
| |
|
|
|
|
|
| |
| |
|
|
|
Adequately | |
|
|
| |
|
Actual | |
|
Capitalized | |
|
Well Capitalized | |
| |
|
| |
|
| |
|
| |
| |
|
Amount | |
|
Ratio | |
|
Amount | |
|
Ratio | |
|
Amount | |
|
Ratio | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
As of December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Consolidated
|
|
$ |
164,566 |
|
|
|
12.20 |
% |
|
$ |
107,883 |
|
|
|
8 |
% |
|
$ |
134,853 |
|
|
|
10 |
% |
| |
Oak Brook Bank
|
|
|
150,547 |
|
|
|
11.24 |
|
|
|
107,119 |
|
|
|
8 |
|
|
|
133,898 |
|
|
|
10 |
|
|
Tier 1 Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Consolidated
|
|
$ |
156,019 |
|
|
|
11.57 |
% |
|
$ |
53,941 |
|
|
|
4 |
% |
|
$ |
80,912 |
|
|
|
6 |
% |
| |
Oak Brook Bank
|
|
|
142,000 |
|
|
|
10.61 |
|
|
|
53,559 |
|
|
|
4 |
|
|
|
80,339 |
|
|
|
6 |
|
|
Tier 1 Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Consolidated
|
|
$ |
156,019 |
|
|
|
7.47 |
% |
|
$ |
83,537 |
|
|
|
4 |
% |
|
$ |
104,421 |
|
|
|
5 |
% |
| |
Oak Brook Bank
|
|
|
142,000 |
|
|
|
6.82 |
|
|
|
83,238 |
|
|
|
4 |
|
|
|
104,048 |
|
|
|
5 |
|
|
As of December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Consolidated
|
|
$ |
150,798 |
|
|
|
13.26 |
% |
|
$ |
90,990 |
|
|
|
8 |
% |
|
$ |
113,738 |
|
|
|
10 |
% |
| |
Oak Brook Bank
|
|
|
138,657 |
|
|
|
12.26 |
|
|
|
90,513 |
|
|
|
8 |
|
|
|
113,142 |
|
|
|
10 |
|
|
Tier 1 Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Consolidated
|
|
$ |
142,429 |
|
|
|
12.52 |
% |
|
$ |
45,495 |
|
|
|
4 |
% |
|
$ |
68,243 |
|
|
|
6 |
% |
| |
Oak Brook Bank
|
|
|
130,288 |
|
|
|
11.52 |
|
|
|
45,257 |
|
|
|
4 |
|
|
|
67,885 |
|
|
|
6 |
|
|
Tier 1 Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Consolidated
|
|
$ |
142,429 |
|
|
|
8.11 |
% |
|
$ |
70,271 |
|
|
|
4 |
% |
|
$ |
87,838 |
|
|
|
5 |
% |
| |
Oak Brook Bank
|
|
|
130,288 |
|
|
|
7.44 |
|
|
|
70,002 |
|
|
|
4 |
|
|
|
87,502 |
|
|
|
5 |
|
71
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
Note 12. Earnings Per Share
The following table sets forth the computation for basic and
diluted earnings per share for the years ended December 31,
2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net income
|
|
$ |
19,072,000 |
|
|
$ |
18,435,000 |
|
|
$ |
10,501,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share-weighted average shares
outstanding
|
|
|
9,763,936 |
|
|
|
9,618,815 |
|
|
|
9,504,638 |
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Stock options issued to employees and directors
|
|
|
241,365 |
|
|
|
255,343 |
|
|
|
260,949 |
|
| |
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share
|
|
|
10,005,301 |
|
|
|
9,874,158 |
|
|
|
9,765,587 |
|
| |
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
$1.95 |
|
|
$ |
1.92 |
|
|
$ |
1.10 |
|
| |
Diluted
|
|
|
$1.91 |
|
|
$ |
1.87 |
|
|
$ |
1.08 |
|
| |
|
|
|
|
|
|
|
|
|
Weighted average options outstanding that were not included in
the denominator for diluted earnings per share totaled 66,360
for 2004; 695 for 2003; and 6,786 for 2002 because their effect
would be antidilutive.
Note 13. Contingencies
The Company and the Bank are not subject to any material pending
or threatened legal actions as of December 31, 2004.
Note 14. Stock-Based
Compensation
In 2004, the Company’s shareholders approved the
nonqualified Incentive Compensation Plan which superseded the
previous Stock Incentive Plan. The Incentive Compensation Plan
allows the Company to grant stock options, deferred
directors’ shares, restricted stock units, stock
appreciation rights and other stock compensation to employees,
directors and consultants. As of December 31, 2004, the
Company has outstanding stock options to employees and directors
in addition to deferred stock units issued to outside directors
in lieu of directors’ fees.
Deferred stock units are maintained on the Company’s books
and represent an obligation to issue shares of Common Stock to
the outside directors. The number of units credited will be
equal to the directors’ fees that would have been received
divided by the closing price of the Common Stock on the last
trading day of the preceding quarter. Additional units will be
credited at the time dividends are paid on the Common Stock. At
December 31, 2004, the Company has 33,664 deferred
directors’ stock units totaling $638,000.
Stock options, which may be granted at a price not less than the
market value on the date of grant, are subject to various
vesting schedules and are exercisable, in part, beginning on the
date of grant and no later than ten years from the date of
grant. No compensation expense was recognized in the
consolidated financial statements with respect to stock options.
72
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
A summary of the Company’s stock option activity, and
related information for the years ended December 31 follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
Weighted- | |
| |
|
|
|
Average | |
|
|
|
Average | |
|
|
|
Average | |
| |
|
|
|
Exercise | |
|
|
|
Exercise | |
|
|
|
Exercise | |
| |
|
Options | |
|
Price | |
|
Options | |
|
Price | |
|
Options | |
|
Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Outstanding at the beginning of the year
|
|
|
719,262 |
|
|
$ |
12.64 |
|
|
|
830,267 |
|
|
$ |
10.81 |
|
|
|
728,325 |
|
|
$ |
9.49 |
|
|
Granted
|
|
|
96,000 |
|
|
|
32.73 |
|
|
|
90,750 |
|
|
|
20.51 |
|
|
|
140,732 |
|
|
|
18.43 |
|
|
Exercised
|
|
|
(222,770 |
) |
|
|
9.18 |
|
|
|
(189,605 |
) |
|
|
7.87 |
|
|
|
(30,601 |
) |
|
|
13.39 |
|
|
Forfeited
|
|
|
(5,820 |
) |
|
|
16.49 |
|
|
|
(12,150 |
) |
|
|
20.58 |
|
|
|
(8,189 |
) |
|
|
14.00 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of the year
|
|
|
586,672 |
|
|
$ |
17.21 |
|
|
|
719,262 |
|
|
$ |
12.64 |
|
|
|
830,267 |
|
|
$ |
10.81 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at the end of the year
|
|
|
349,662 |
|
|
$ |
12.63 |
|
|
|
478,622 |
|
|
$ |
10.39 |
|
|
|
579,767 |
|
|
$ |
8.96 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise prices for options outstanding as of December 31,
2004 ranged from $5.92 to $33.70 per share.
Using a range of exercise prices, the following table summarizes
the number and weighted-average exercise price for options
outstanding and separately for options exercisable. In addition,
weighted-average contractual life is disclosed on options
outstanding at December 31, 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding | |
|
Options Exercisable | |
| |
|
| |
|
| |
| |
|
|
|
Weighted-Average | |
|
|
|
|
| |
|
Number | |
|
Remaining | |
|
Weighted-Average | |
|
Number | |
|
Weighted-Average | |
| Range of |
|
Outstanding | |
|
Contractual Life | |
|
Exercise Price | |
|
Exercisable | |
|
Exercise Price | |
| Exercise Prices |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$ 5.92 – 10.00
|
|
|
77,300 |
|
|
|
1.5 |
years |
|
$ |
7.27 |
|
|
|
77,300 |
|
|
$ |
7.27 |
|
|
10.01 – 15.00
|
|
|
215,972 |
|
|
|
4.7 |
|
|
|
12.18 |
|
|
|
188,912 |
|
|
|
12.25 |
|
|
15.01 – 20.00
|
|
|
107,850 |
|
|
|
6.7 |
|
|
|
17.80 |
|
|
|
60,450 |
|
|
|
17.64 |
|
|
20.01 – 25.00
|
|
|
89,550 |
|
|
|
8.1 |
|
|
|
20.58 |
|
|
|
23,000 |
|
|
|
20.70 |
|
|
25.01 – 30.00
|
|
|
21,000 |
|
|
|
9.4 |
|
|
|
29.77 |
|
|
|
— |
|
|
|
— |
|
|
30.01 – 33.70
|
|
|
75,000 |
|
|
|
9.1 |
|
|
|
33.56 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
586,672 |
|
|
|
5.9 |
|
|
$ |
17.21 |
|
|
|
349,662 |
|
|
$ |
12.63 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2002, the Company began an Employee Stock Purchase Plan
(“ESPP”) that allows eligible employees to withhold up
to 15% of their salary up to $23,250 for the purchase of the
Company’s Common Stock. Ineligible employees include those
who own 5% or greater of the Company’s stock and seasonal
employees. Amounts withheld are maintained by the Bank as a
noninterest-bearing liability and used to purchase stock at a
discount price of up to 10% of the lesser of the fair market
value of the common stock on the first day or the last day of
the six-month offering period. During 2004, 2003 and 2002, the
Company issued 9,303, 10,779 and 5,181 shares at a discount of
7%. No compensation expense was recognized in the consolidated
financial statements with respect to this plan.
Pro forma information regarding net income and earnings per
share is required by SFAS No. 123 “Accounting for
Stock-Based Compensation” as amended by SFAS No. 148
“Accounting for Stock-Based Compensation-Transition and
Disclosure” and has been determined as if the Company had
accounted for its stock-based compensation plans under the fair
value method of that Statement. The fair value is estimated at
each grant date using a Black-Scholes valuation model.
The Black-Scholes valuation model was developed for use in
estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including expected stock price volatility. Because
the Company’s stock options have characteristics
significantly different from those of traded options, and
because changes in the
73
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
subjective input assumptions can materially affect the fair
value estimate, in management’s opinion, the existing
models do not necessarily provide a reliable single measure of
the fair value of its stock options.
The Company grants stock options at various times of the year
and has granted the purchase rights for the ESPP every six
months since inception. The following table outlines the
weighted average assumptions input into the Black-Scholes
valuation model to calculate fair value for both the Incentive
Compensation Plan and the ESPP. The weighted average assumptions
used in the Black-Scholes model are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Incentive Compensation Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total number of options granted during the year
|
|
|
96,000 |
|
|
|
90,750 |
|
|
|
140,732 |
|
| |
Risk-free interest rate
|
|
|
3.79 |
% |
|
|
3.38 |
% |
|
|
3.47 |
% |
| |
Expected life, in years
|
|
|
6.32 |
|
|
|
6.48 |
|
|
|
6.16 |
|
| |
Expected volatility
|
|
|
28.1 |
% |
|
|
28.5 |
% |
|
|
31.2 |
% |
| |
Expected dividend yield
|
|
|
2.2 |
% |
|
|
3.0 |
% |
|
|
3.0 |
% |
| |
Estimated fair value per option
|
|
$ |
8.92 |
|
|
$ |
5.16 |
|
|
$ |
4.79 |
|
|
Employee Stock Purchase Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Risk-free interest rate
|
|
|
2.04 |
% |
|
|
1.07 |
% |
|
|
1.31 |
% |
| |
Expected life, in years
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
0.5 |
|
| |
Expected volatility
|
|
|
23.7 |
% |
|
|
25.0 |
% |
|
|
24.6 |
% |
For the purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the
options’ vesting period. The Company’s pro forma
information follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net income as reported
|
|
$ |
19,072,000 |
|
|
$ |
18,435,000 |
|
|
$ |
10,501,000 |
|
|
Deduct stock-based compensation expense determined under fair
value based methods, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Incentive compensation plan
|
|
|
(326,000 |
) |
|
|
(249,000 |
) |
|
|
(215,000 |
) |
| |
Employee stock purchase plan
|
|
|
(27,000 |
) |
|
|
(21,000 |
) |
|
|
(2,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
18,719,000 |
|
|
$ |
18,165,000 |
|
|
$ |
10,284,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Earnings per share as reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Basic
|
|
$ |
1.95 |
|
|
$ |
1.92 |
|
|
$ |
1.10 |
|
| |
|
Diluted
|
|
$ |
1.91 |
|
|
$ |
1.87 |
|
|
$ |
1.08 |
|
|
Pro forma earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Basic
|
|
$ |
1.92 |
|
|
$ |
1.89 |
|
|
$ |
1.08 |
|
| |
|
Diluted
|
|
$ |
1.87 |
|
|
$ |
1.84 |
|
|
$ |
1.05 |
|
|
|
| Note 15. |
Employee Benefit Plans |
The Company has a 401(k) savings plan that allows eligible
employees to defer a percentage of their salary, not to exceed
25%. The Company matches dollar for dollar up to 4% of the
employee’s eligible salary. All participant and employer
contributions are 100% vested. For 2004, 2003 and 2002, the
Company’s expense for this plan was $580,000, $541,000, and
$502,000, respectively.
The Company has a profit sharing plan, under which the Company,
at its discretion, could contribute up to the maximum amount
deductible for the year. For 2004, 2003 and 2002, the
Company’s expense for this plan was $340,000, $322,000 and
$149,000, respectively.
74
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
The Company has an executive deferred compensation plan. The
purpose of this non-qualified plan is to allow certain executive
officers the opportunity to maximize their elective
contributions to the 401(k) savings plan and provide
contributions notwithstanding certain restrictions or
limitations in the Internal Revenue Code. The Company has both
an asset and an offsetting liability recorded in the
consolidated financial statements totaling $2,292,000 and
$1,840,000 at December 31, 2004 and 2003, respectively. For
2004, 2003 and 2002, the Company’s expense for this plan
was $99,000, $152,000 and $28,000, respectively.
The Company has entered into supplemental pension agreements
with certain senior executive officers. Under these agreements,
the Company is obligated to provide at a prescribed retirement
date, a supplemental pension based upon a percentage of the
executive officer’s final base salary. The Company’s
liability recorded for this plan totaled $1,819,000 and
$1,456,000 at December 31, 2004 and 2003, respectively. The
Company’s expense for this plan was $363,000 in 2004 and
$291,000 in 2003. No expense was required in 2002 as determined
by a review of the plan by independent actuaries.
|
|
| Note 16. |
Related Party Transactions |
The Bank has made, and expects in the future to continue to
make, loans to the directors, executive officers and affiliates
of the Bank and the Company. Related party loans are made on
substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with unrelated parties and do not involve more than
normal risk of collectibility. The aggregate amount of these
loans was $7,828,000 and $5,037,000 at December 31, 2004
and 2003, respectively. During 2004, principal additions totaled
$7,661,000 and principal payments totaled $5,845,000. During
2004, three loans with a combined outstanding balance at
December 31, 2003 of $975,000 were added due to the related
party being designated by the Board of Directors as an executive
officer of the Bank in April 2004. All new loans, advances and
paydowns related to this employee’s loans during 2004 as
well as the outstanding balance at December 31, 2004 are
included in the amounts disclosed above.
Certain principal shareholders of the Company are also principal
shareholders of Amalgamated Investments Company, parent of
Amalgamated Bank of Chicago. The Bank may enter into loan
participations with Amalgamated Bank of Chicago; however, the
Company had no participations purchased from or sold to
Amalgamated Bank of Chicago at December 31, 2004 and 2003.
|
|
| Note 17. |
Commitments and Financial Instruments With Off Balance Sheet
Risk |
In the normal course of business, there are various outstanding
commitments and contingent liabilities, including commitments to
extend credit, standby letters of credit and commercial letters
of credit (collectively “commitments”) that are not
reflected in the consolidated financial statements.
The Company’s exposure to credit loss in the event of
nonperformance by the other party to the commitments is limited
to their contractual amount. Many commitments expire without
being used. Therefore, the amounts stated below do not
necessarily represent future cash commitments. 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. These commitments are
subject to the same credit policies followed for loans recorded
in the financial statements.
75
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
A summary of these commitments to extend credit at
December 31 follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Commercial loans
|
|
$ |
55,728 |
|
|
$ |
50,064 |
|
|
Syndicated loans
|
|
|
62,576 |
|
|
|
41,958 |
|
|
Real estate:
|
|
|
|
|
|
|
|
|
| |
Construction, land acquisition and development loans
|
|
|
89,168 |
|
|
|
41,034 |
|
| |
Commercial mortgage
|
|
|
1,351 |
|
|
|
855 |
|
| |
Home equity loans
|
|
|
156,036 |
|
|
|
134,031 |
|
| |
Residential mortgage
|
|
|
127 |
|
|
|
127 |
|
|
Check credit
|
|
|
727 |
|
|
|
766 |
|
|
Consumer
|
|
|
35 |
|
|
|
114 |
|
|
Performance standby letters of credit
|
|
|
12,034 |
|
|
|
8,656 |
|
|
Financial standby letters of credit
|
|
|
6,922 |
|
|
|
4,082 |
|
| |
|
|
|
|
|
|
|
Total commitments
|
|
$ |
384,704 |
|
|
$ |
281,687 |
|
| |
|
|
|
|
|
|
There were no amounts outstanding against the standby letters of
credit as of December 31, 2004 or 2003. Of these
guarantees, 53% have terms of less than one year; 22% have terms
of one to three years; 15% have terms of three to five years;
and 10% have terms of five years or more. The Company’s
exposure to loss on the guarantee is minimal as each letter of
credit is fully collateralized.
|
|
| Note 18. |
Fair Value of Financial Instruments |
Statement of Financial Accounting Standards No. 107,
“Disclosures about Fair Value of Financial
Instruments,” requires the disclosure of the fair value of
certain financial instruments. Fair value of a financial
instrument is defined as the amount at which the instrument
could be exchanged in a current transaction between willing
parties other than in a forced liquidation sale. The following
methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
|
|
| |
Cash and cash equivalents: The carrying amounts reported
on the balance sheet for cash and due from banks, Fed funds sold
and interest-bearing deposits with banks approximate fair value. |
| |
| |
Investment securities: Fair values for investment
securities are based on quoted market prices. |
| |
| |
Loans: For variable rate loans that reprice frequently
and with no significant change in credit risk, fair values are
based on carrying amounts. The fair value for all other loans is
estimated using discounted cash flow analyses, which uses
interest rates currently being offered for similar loans of
similar credit quality. The fair value does not include
potential premiums available in a portfolio sale. |
| |
| |
Cash surrender value of Bank Owned Life Insurance
(“BOLI”): The cash surrender value of BOLI is
carried at cost which approximates fair value. |
| |
| |
Accrued interest receivable: The carrying amounts of
accrued interest receivable approximate fair value as it is
short-term in nature and does not present unanticipated credit
concerns. |
| |
| |
Deposit liabilities: The fair values for certain deposits
(e.g., noninterest-bearing demand deposits, savings deposits,
NOW and money market accounts) are, by definition, equal to the
amount payable on demand. The fair value estimates do not
include the intangible value of the existing customer base. The
carrying amounts for variable rate money market accounts
approximate their fair values. Fair values for time deposits are
estimated using a discounted cash flow calculation that applies
interest rates currently being offered on time deposits to a
schedule of aggregated expected monthly maturities. |
76
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
|
|
| |
Short-term debt: The carrying amounts of Fed funds
purchased, overnight repurchase agreements and treasury, tax and
loan demand notes approximate their fair values. At
December 31, 2003, the fair values of term repurchase
agreements were estimated using a discounted cash flow
calculation that utilizes interest rates currently being offered
for similar maturities. There were no term repurchase agreements
at December 31, 2004. |
| |
| |
FHLB of Chicago borrowings: The fair value of the FHLB of
Chicago borrowings is estimated using a discounted cash flow
calculation that utilizes interest rates currently being offered
for similar maturities. |
| |
| |
Trust Preferred Capital Securities: The fair value of the
TRUPS is estimated using a discounted cash flow calculation that
utilizes interest rates currently being offered for similar
maturities. |
| |
| |
Accrued interest payable: The carrying amounts of accrued
interest payable approximate fair value as it is short-term in
nature. |
| |
| |
Off-balance sheet instruments: Fair values for the
Company’s off-balance sheet instruments (letters of credit
and lending commitments) are generally based on fees currently
charged to enter into similar agreements. |
| |
| |
Limitations: The assumptions and estimates used in the
fair value determination process are subjective in nature and
involve uncertainties and significant judgment and, therefore,
fair values cannot be determined with precision. Changes in
assumptions could significantly affect these estimated values. |
The estimated fair values of the Company’s significant
financial instruments as of December 31, 2004 and 2003 are
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
Carrying | |
|
|
|
Carrying | |
|
|
| |
|
Amount | |
|
Fair Value | |
|
Amount | |
|
Fair Value | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
(Dollars in thousands) | |
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
85,752 |
|
|
$ |
85,752 |
|
|
$ |
66,316 |
|
|
$ |
66,316 |
|
| |
Investment securities
|
|
|
841,077 |
|
|
|
841,133 |
|
|
|
783,471 |
|
|
|
783,787 |
|
| |
Loans
|
|
|
1,071,655 |
|
|
|
1,068,058 |
|
|
|
915,678 |
|
|
|
917,368 |
|
| |
Cash surrender value of BOLI
|
|
|
24,858 |
|
|
|
24,858 |
|
|
|
21,011 |
|
|
|
21,011 |
|
| |
Accrued interest receivable
|
|
|
10,884 |
|
|
|
10,884 |
|
|
|
8,416 |
|
|
|
8,416 |
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Time deposits
|
|
|
991,480 |
|
|
|
989,816 |
|
|
|
810,104 |
|
|
|
812,725 |
|
| |
Other deposits
|
|
|
723,056 |
|
|
|
723,056 |
|
|
|
648,398 |
|
|
|
648,398 |
|
| |
Short-term debt
|
|
|
33,077 |
|
|
|
33,077 |
|
|
|
69,910 |
|
|
|
69,897 |
|
| |
FHLB of Chicago borrowings
|
|
|
161,418 |
|
|
|
162,388 |
|
|
|
161,500 |
|
|
|
165,020 |
|
| |
Trust Preferred Capital Securities
|
|
|
23,713 |
|
|
|
24,641 |
|
|
|
23,000 |
|
|
|
23,540 |
|
| |
Accrued interest payable
|
|
|
5,187 |
|
|
|
5,187 |
|
|
|
3,310 |
|
|
|
3,310 |
|
|
Off-balance sheet commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Performance standby letters of credit
|
|
|
— |
|
|
|
120 |
|
|
|
— |
|
|
|
87 |
|
| |
Financial standby letters of credit
|
|
|
— |
|
|
|
69 |
|
|
|
— |
|
|
|
41 |
|
| |
Home equity
|
|
|
— |
|
|
|
132 |
|
|
|
— |
|
|
|
121 |
|
| |
Check credit
|
|
|
— |
|
|
|
19 |
|
|
|
— |
|
|
|
20 |
|
77
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
|
|
| Note 19. |
Parent Company Only Financial Information |
Following are the condensed balance sheets, statements of income
and cash flows for First Oak Brook Bancshares, Inc.:
Balance Sheets (Parent Company Only)
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Assets |
| |
Cash and cash equivalents on deposit with subsidiary
|
|
$ |
7,782 |
|
|
$ |
10,262 |
|
| |
Investment in subsidiaries
|
|
|
143,550 |
|
|
|
132,267 |
|
| |
Securities available-for-sale, at fair value
|
|
|
4,325 |
|
|
|
3,398 |
|
| |
Due from subsidiaries
|
|
|
3,464 |
|
|
|
837 |
|
| |
Equipment, net
|
|
|
88 |
|
|
|
87 |
|
| |
Other assets
|
|
|
3,702 |
|
|
|
1,983 |
|
| |
|
|
|
|
|
|
| |
|
Total Assets
|
|
$ |
162,911 |
|
|
$ |
148,834 |
|
| |
|
|
|
|
|
|
| |
|
Liabilities and Shareholders’ equity |
| |
Junior subordinated notes issued to capital trusts
|
|
$ |
23,713 |
|
|
$ |
— |
|
| |
Trust Preferred Capital Securities
|
|
|
— |
|
|
|
23,000 |
|
| |
Other liabilities
|
|
|
5,411 |
|
|
|
4,942 |
|
| |
|
|
|
|
|
|
| |
|
Total Liabilities
|
|
|
29,124 |
|
|
|
27,942 |
|
| |
Shareholders’ Equity
|
|
|
133,787 |
|
|
|
120,892 |
|
| |
|
|
|
|
|
|
| |
|
Total Liabilities and Shareholders’ Equity
|
|
$ |
162,911 |
|
|
$ |
148,834 |
|
| |
|
|
|
|
|
|
78
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
Statements of Income (Parent Company Only)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Dividends from subsidiaries
|
|
$ |
9,324 |
|
|
$ |
8,946 |
|
|
$ |
10,692 |
|
| |
Other income
|
|
|
1,324 |
|
|
|
1,130 |
|
|
|
1,007 |
|
| |
Investment securities gains, net
|
|
|
— |
|
|
|
288 |
|
|
|
233 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total income
|
|
|
10,648 |
|
|
|
10,364 |
|
|
|
11,932 |
|
| |
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest on short-term debt
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
| |
Interest on junior subordinated notes issued to capital trusts
|
|
|
1,526 |
|
|
|
— |
|
|
|
— |
|
| |
Interest on Trust Preferred Capital Securities
|
|
|
— |
|
|
|
1,247 |
|
|
|
998 |
|
| |
Other expenses
|
|
|
3,422 |
|
|
|
3,541 |
|
|
|
2,216 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total expenses
|
|
|
4,948 |
|
|
|
4,788 |
|
|
|
3,218 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income before income taxes and equity in undistributed net
income of subsidiaries
|
|
|
5,700 |
|
|
|
5,576 |
|
|
|
8,714 |
|
| |
Income tax benefit
|
|
|
1,271 |
|
|
|
1,187 |
|
|
|
683 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income before equity in undistributed net income of subsidiaries
|
|
|
6,971 |
|
|
|
6,763 |
|
|
|
9,397 |
|
| |
Equity in undistributed net income of subsidiaries
|
|
|
12,101 |
|
|
|
11,672 |
|
|
|
1,104 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
19,072 |
|
|
$ |
18,435 |
|
|
$ |
10,501 |
|
| |
|
|
|
|
|
|
|
|
|
79
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
Statements of Cash Flows (Parent Company Only)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net income
|
|
$ |
19,072 |
|
|
$ |
18,435 |
|
|
$ |
10,501 |
|
| |
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Depreciation
|
|
|
32 |
|
|
|
26 |
|
|
|
16 |
|
| |
|
|
Discount accretion
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
| |
|
|
Premium amortization
|
|
|
24 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
Investment securities gains, net
|
|
|
— |
|
|
|
(288 |
) |
|
|
(233 |
) |
| |
|
|
Stock dividend
|
|
|
— |
|
|
|
— |
|
|
|
(8 |
) |
| |
|
|
Increase in other assets
|
|
|
(324 |
) |
|
|
(620 |
) |
|
|
(247 |
) |
| |
|
|
Increase (decrease) in other liabilities
|
|
|
1,971 |
|
|
|
2,093 |
|
|
|
(799 |
) |
| |
|
|
(Increase) decrease in due from subsidiaries
|
|
|
(2,627 |
) |
|
|
22 |
|
|
|
(779 |
) |
| |
|
|
Equity in undistributed net income of subsidiaries
|
|
|
(12,101 |
) |
|
|
(11,672 |
) |
|
|
(1,104 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Net cash provided by operating activities
|
|
|
6,047 |
|
|
|
8,003 |
|
|
|
7,347 |
|
| |
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Purchases of available-for-sale securities
|
|
|
(1,642 |
) |
|
|
(5,042 |
) |
|
|
(1,164 |
) |
| |
|
|
Sales of available-for-sale securities
|
|
|
817 |
|
|
|
3,313 |
|
|
|
570 |
|
| |
|
|
Purchases of equipment
|
|
|
(33 |
) |
|
|
(38 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Net cash used in investing activities
|
|
|
(858 |
) |
|
|
(1,767 |
) |
|
|
(594 |
) |
| |
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Decrease in short-term debt
|
|
|
— |
|
|
|
— |
|
|
|
(1,225 |
) |
| |
|
|
Proceeds from Trust Preferred Capital Securities
|
|
|
— |
|
|
|
5,000 |
|
|
|
12,000 |
|
| |
|
|
Exercise of stock options
|
|
|
76 |
|
|
|
1,169 |
|
|
|
399 |
|
| |
|
|
Payment (issuance) of notes receivable on exercised options
|
|
|
— |
|
|
|
100 |
|
|
|
(300 |
) |
| |
|
|
Issuance of common stock for employee stock purchase plan
|
|
|
251 |
|
|
|
211 |
|
|
|
102 |
|
| |
|
|
Purchase of treasury stock
|
|
|
(969 |
) |
|
|
(149 |
) |
|
|
— |
|
| |
|
|
Cash dividends
|
|
|
(6,027 |
) |
|
|
(4,298 |
) |
|
|
(3,319 |
) |
| |
|
|
Capital contribution to subsidiary
|
|
|
(1,000 |
) |
|
|
(4,156 |
) |
|
|
(8,372 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Net cash used in financing activities
|
|
|
(7,669 |
) |
|
|
(2,123 |
) |
|
|
(715 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Net (decrease) increase in cash and cash equivalents
|
|
|
(2,480 |
) |
|
|
4,113 |
|
|
|
6,038 |
|
| |
Cash and cash equivalents at beginning of year
|
|
|
10,262 |
|
|
|
6,149 |
|
|
|
111 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents at end of year
|
|
$ |
7,782 |
|
|
$ |
10,262 |
|
|
$ |
6,149 |
|
| |
|
|
|
|
|
|
|
|
|
80
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
The management of the Company is responsible for establishing
and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Under the supervision and with the
participation of the Company’s management, including its
Chief Executive Officer and its Chief Financial Officer, the
Company’s management assessed the effectiveness of internal
control over financial reporting based on the criteria
established in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organization of the
Treadway Commission (COSO), as of December 31, 2004. Based
on this evaluation under the criteria established in Internal
Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), the
Company’s management concluded that its internal control
over financial reporting was effective as of December 31,
2004.
Management’s assessment of the effectiveness of the
Company’s internal control over financial reporting as of
December 31, 2004 has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in
their attestation report, which appears on page 83.
81
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
First Oak Brook Bancshares, Inc.:
We have audited the accompanying consolidated balance sheets of
First Oak Brook Bancshares Inc. and subsidiaries (the Company)
as of December 31, 2004 and 2003, and the related
consolidated statements of income, stockholders’ equity,
and cash flows for each of the years in the three-year period
ended December 31, 2004. These consolidated financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2004 and 2003,
and the results of their operations and their cash flows for
each of the years in the three-year period ended
December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2004, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission, and our report dated March 10,
2005 expressed an unqualified opinion on management’s
assessment of, and the effective operation of, internal control
over financial reporting.
Chicago, Illinois
March 10, 2005
82
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
First Oak Brook Bancshares, Inc.:
We have audited management’s assessment, included in the
accompanying Management’s Report on Internal Controls over
Financial Reporting that First Oak Brook Bancshares, Inc. and
its subsidiaries (First Oak Brook Bancshares) maintained
effective internal control over financial reporting as of
December 31, 2004, based on criteria established in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). First Oak Brook Bancshares’ management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on management’s assessment and an
opinion on the effectiveness of First Oak Brook Bancshares’
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that First Oak
Brook Bancshares maintained effective internal control over
financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on criteria established
in Internal Control — Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Also, in our opinion, First Oak Brook
Bancshares maintained, in all material respects, effective
internal control over financial reporting as of
December 31, 2004, based on criteria established in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
83
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of First Oak Brook Bancshares, Inc.
and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of income, changes in
stockholders’ equity and comprehensive income, and cash
flows for each of the years in the three-year period ended
December 31, 2004, and our report dated March 10, 2005
expressed an unqualified opinion on those consolidated financial
statements.
Chicago, Illinois
March 10, 2005
84
|
|
| ITEM 9. |
Changes In And Disagreements With Accountants On
Accounting And Financial Disclosure |
None.
ITEM 9A. Controls and
Procedures
As of the end of the period covered by this report, the
Company’s Chief Executive Officer and Chief Financial
Officer carried out an evaluation under their supervision, with
the participation of other members of management as they deemed
appropriate, of the effectiveness of the design and operation of
the Company’s disclosure controls and procedures. Based
upon, and as of the date of, that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded
that the Company’s disclosure controls and procedures were
effective, in all material respects, to ensure that information
required to be disclosed by the Company in the reports filed or
submitted by it under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
rules and forms of the SEC, and include controls and procedures
designed to ensure that information required to be disclosed by
the Company in such reports is accumulated and communicated to
the Company’s management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosures.
In the fourth quarter of 2004, there has been no change in the
Company’s internal control over financial reporting that
has materially affected, or is reasonably likely to affect, the
Company’s internal control over financial reporting.
ITEM 9B. Other
Information
None.
PART III
ITEM 10. Directors And
Executive Officers Of The Registrant
See information under the caption “Directors and Executive
Officers” regarding the director and executive officers of
the Company in the Company’s Proxy Statement for its 2005
Annual Meeting to be filed by April 8, 2005, which is
incorporated herein by reference.
See information regarding the Company’s Audit Committee of
its Board of Directors and its “Audit Committee Financial
Expert” under the caption “Board of Directors,
Meetings, Committees, Functions, Membership and
Compensation” in the Company’s Proxy Statement for its
2005 Annual Meeting to be filed by April 8, 2005, which is
incorporated herein by reference.
See information under the caption “Section 16(a)
Beneficial Ownership Reporting Compliance” in the
Company’s Proxy Statement for its 2005 Annual Meeting to be
filed by April 8, 2005, which is incorporated herein by
reference.
Code of Ethics
The Company has adopted a Code of Ethics as required by Nasdaq
listing standards and the rules of the SEC. The Code of Ethics
applies to all of the Company’s directors, officers,
including the Company’s Chief Executive Officer and Chief
Financial Officer, and employees. The Code of Ethics is publicly
available on the website at www.firstoakbrook.com. If the
Company makes substantive amendments to the Code of Ethics or
grants any waiver, including any implicit waiver, that applies
to any director or executive officer of the Company, it will
disclose the nature of such amendment or waiver on the website
or in a report on Form 8-K in accordance with applicable
Nasdaq and SEC rules.
ITEM 11. Executive
Compensation
See information under the captions “Compensation Committee
Interlocks and Insider Participation”, “Report of
Compensation Committee and Stock Option Advisory Committee on
Executive Compensation
85
and Other Compensation Matters”, “Summary Compensation
Table”, “Summary Compensation Table Footnotes”,
“Transitional Employment and Other Agreements with
Executive Officers”, “Option Grants Table”,
“Aggregated Option Exercises in Last Fiscal Year and
Year-End Option Values”, and “Five Year Performance
Comparison” included in the Company’s Proxy Statement
for its 2005 Annual Meeting to be filed by April 8, 2005,
which is incorporated herein by reference.
|
|
| ITEM 12. |
Security Ownership Of Certain Beneficial Owners And
Management And Related Shareholder Matters |
See information under the caption “Information Concerning
Security Ownership of Certain Beneficial Owners and
Management” included in the Company’s Proxy Statement
for its 2005 Annual Meeting to be filed by April 8, 2005,
which is incorporated herein by reference.
See information under the caption “Equity Compensation Plan
Information” included in the Company’s Proxy Statement
for its 2005 Annual Meeting to be filed by April 8, 2005,
which is incorporated herein by reference.
ITEM 13. Certain
Relationships And Related Transactions
See information under the caption “Transactions with
Related Persons” included in the Company’s Proxy
Statement for its 2005 Annual Meeting to be filed by
April 8, 2005, which is incorporated herein by reference.
ITEM 14. Principal Accountant
Fees and Services
See information under the caption “Principal Accountant
Fees and Services” in the Company’s Proxy Statement
for its 2005 Annual Meeting to be filed by April 8, 2005,
which is incorporated herein by reference.
PART IV
ITEM 15. Exhibits and
Financial Statement Schedules
|
|
| (a) |
1. FINANCIAL STATEMENTS |
The following consolidated financial statements are filed as
part of this document under Item 8:
| |
|
|
|
|
|
Consolidated Balance Sheets— December 31, 2004 and 2003
|
|
|
|
|
|
Consolidated Statements of Income for each of the three years in
the period ended December 31, 2004
|
|
|
|
|
|
Consolidated Statements of Changes in Shareholders’ Equity
for each of the three years in the period ended
December 31, 2004
|
|
|
|
|
|
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2004
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
|
|
|
|
Independent Auditors’ Report
|
|
|
|
|
2. FINANCIAL
STATEMENT SCHEDULES
|
|
| |
All schedules have been included in the consolidated financial
statements or the notes thereto or are either not applicable or
not significant. |
86
(b) EXHIBITS
Documents indicated by “*” are filed with this
Form 10-K.
| |
|
|
|
Exhibit (3.1)
|
|
Restated Certificate of Incorporation of the Company
(Exhibit 3.1 to the Company’s Amendment No. 1 to
Registration Statement on Form 8-A filed May 6, 1999,
incorporated herein by reference). |
|
Exhibit (3.2)
|
|
Amended and Restated By-Laws of the Company as amended through
January 27, 2004 (Exhibit 3.2 to the Company’s
Form 10-Q Quarterly report for the period ended
March 31, 2004, incorporated herein by reference). |
|
Exhibit (4.1)
|
|
Form of Common Stock Certificate (Exhibit 4.1 to the
Company’s Form 10-Q Quarterly Report for the period
ended June 30, 1999, incorporated herein by reference). |
|
Exhibit (4.2)
|
|
Rights Agreement, dated as of May 4, 1999 between the
Company and Oak Brook Bank, as Rights Agent (Exhibit 4.1 to
the Company’s Registration Statement on Form 8-A filed
May 21, 1999, incorporated herein by reference). |
|
Exhibit (4.3)
|
|
Certificate of Designations Preferences and Rights of
Series A Preferred Stock (Exhibit A to
Exhibit 4.1 to the Company’s Registration Statement on
Form 8-A filed May 21, 1999, incorporated herein by
reference). |
|
Exhibit (4.4)
|
|
Form of Rights Certificate (Exhibit B to Exhibit 4.1
to the Company’s Registration Statement on Form 8-A
filed May 21, 1999, incorporated herein by reference). |
|
Exhibit (10.1)
|
|
Twelfth Amendment to Revolving Credit Agreement between First
Oak Brook Bancshares, Inc. and LaSalle Bank National Association
dated April 1, 2004. (Exhibit 10.1 to the
Company’s Form 10-Q Quarterly Report for the period
ended June 30, 2004, incorporated herein by reference). |
|
Exhibit (10.2)
|
|
First Oak Brook Bancshares, Inc. Executive Deferred Compensation
Plan effective November 1, 1997. (Exhibit 10.3 to the
Company’s Form 10-K Annual Report for the year ended
December 31, 1997, incorporated herein by reference). |
|
Exhibit (10.3)
|
|
First Oak Brook Bancshares, Inc. 2001 Stock Incentive Plan
effective January 23, 2001. (Appendix A to the
Company’s Proxy and Notice of Annual Meeting of
Shareholders filed April 2, 2001, incorporated herein by
reference). |
|
Exhibit (10.4)
|
|
License Agreement, between Jack Henry & Associates, Inc. and
First Oak Brook Bancshares, Inc. dated March 10, 1993.
(Exhibit 10.8 to the Company’s Form 10-K Annual
Report for the year ended December 31, 1994, incorporated
herein by reference). |
|
Exhibit (10.5)
|
|
Form of Transitional Employment Agreement for Eugene P. Heytow,
Richard M. Rieser, Jr. and Frank M. Paris. (Exhibit 10.9 to
the Company’s Form 10-K Annual Report for the year
ended December 31, 1998, incorporated herein by reference). |
|
Exhibit (10.6)
|
|
Form of Transitional Employment Agreement for Senior Officers.
(Exhibit 10.10 to the Company’s Form 10-K Annual
Report for the year ended December 31, 1998, incorporated
herein by reference). |
|
Exhibit (10.7)
|
|
Form of Agreement Regarding Post-Employment Restrictive
Covenants for Eugene P. Heytow, Richard M. Rieser, Jr. and Frank
M. Paris. (Exhibit 10.11 to the Company’s
Form 10-K Annual Report for the year ended
December 31, 1994, incorporated herein by reference). |
|
Exhibit (10.8)
|
|
Form of Supplemental Pension Benefit Agreement for Eugene P.
Heytow. (Exhibit 10.12 to the Company’s Form 10-K
Annual Report for the year ended December 31, 1994,
incorporated herein by reference). |
|
Exhibit (10.9)
|
|
Form of Supplemental Pension Benefit Agreement for Richard M.
Rieser, Jr. (Exhibit 10.13 to the Company’s
Form 10-K Annual Report for the year ended
December 31, 1994, incorporated herein by reference). |
|
Exhibit (10.10)
|
|
Senior Executive Insurance Plan. (Exhibit 10.14 to the
Company’s Form 10-K Annual Report for the year ended
December 31, 1995, incorporated herein by reference). |
87
| |
|
|
|
Exhibit (10.11)
|
|
First Oak Brook Bancshares, Inc. Annual Performance Bonus Plan
effective January 1, 2001. (Appendix B to the
Company’s Proxy and Notice of Annual Meeting of
Shareholders filed April 2, 2001, incorporated herein by
reference). |
|
Exhibit (10.12)
|
|
First Oak Brook Bancshares, Inc. Directors Stock Plan
(Form S-8 filed October 25, 1999, incorporated herein
by reference). |
|
Exhibit (10.13)
|
|
First Oak Brook Bancshares, Inc. Incentive Compensation Plan
(Appendix A to the Company’s Proxy and Notice of
Annual Meeting of Shareholders filed March 30, 2004,
incorporated herein by reference.) |
|
Exhibit (10.14)
|
|
Form of Stock Option Agreement under the Company’s
Incentive Compensation Plan.* |
|
Exhibit (10.15)
|
|
Form of Restricted Stock Unit Award Agreement under the
Company’s Incentive Compensation Plan.* |
|
Exhibit (10.16)
|
|
Form of Agreement Regarding Confidentiality, Non-Solicitation of
Customers and Employees and Prohibited Conduct.* |
|
Exhibit (10.17)
|
|
Form of Retirement Agreement for Eugene P. Heytow
(Exhibit 99.1 to the Company’s Form 8-K Current
Report filed March 9, 2005, incorporated herein by
reference.) |
|
Exhibit (21)
|
|
Subsidiaries of the Registrant.* |
|
Exhibit (23)
|
|
Consent of KPMG LLP.* |
|
Exhibit (31.1)
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 of Eugene P. Heytow, Chief Executive Officer.* |
|
Exhibit (31.2)
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 of Rosemarie Bouman, Chief Financial Officer.* |
|
Exhibit (32.1)
|
|
Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of Eugene P. Heytow, Chief Executive Officer.* |
|
Exhibit (32.2)
|
|
Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of Rosemarie Bouman, Chief Financial Officer.* |
Exhibits 10.2, 10.3 and 10.5 through 10.16 are management
contracts or compensatory plans or arrangements required to be
filed as an Exhibit to this Form 10-K pursuant to
Item 15 hereof.
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
| |
First Oak Brook
Bancshares, Inc.
|
| |
(Registrant) |
| |
| |
By: /s/ Eugene P.
Heytow
|
| |
|
| |
Eugene P. Heytow, |
| |
Chairman of the Board and Chief Executive Officer |
| |
| |
DATE: March 10, 2005 |
|
|
| |
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated. |
| |
|
|
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| |
| |
/s/ Eugene P. Heytow
Eugene P. Heytow |
|
Chairman of the Board
and Chief Executive Officer |
|
March 10, 2005 |
| |
/s/ Frank M. Paris
Frank M. Paris |
|
Vice Chairman of the Board |
|
March 10, 2005 |
| |
| |
/s/ Richard M. Rieser,
Jr.
Richard M. Rieser, Jr. |
|
President, Assistant Secretary, and
Director |
|
March 10, 2005 |
| |
/s/ Miriam Lutwak
Fitzgerald
Miriam Lutwak Fitzgerald |
|
Director |
|
March 10, 2005 |
| |
/s/ Geoffrey R. Stone
Geoffrey R. Stone |
|
Director |
|
March 10, 2005 |
| |
/s/ Michael L. Stein
Michael L. Stein |
|
Director |
|
March 10, 2005 |
| |
/s/ Stuart I. Greenbaum
Stuart I. Greenbaum |
|
Director |
|
March 10, 2005 |
| |
/s/ John W. Ballantine
John W. Ballantine |
|
Director |
|
March 10, 2005 |
| |
/s/ Charles J. Gries
Charles J. Gries |
|
Director |
|
March 10, 2005 |
| |
| |
/s/ Rosemarie Bouman
Rosemarie Bouman |
|
Vice President and Chief
Financial Officer |
|
March 10, 2005 |
| |
/s/ Jill D. Wachholz
Jill D. Wachholz |
|
Chief Accounting Officer |
|
March 10, 2005 |
89
