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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
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to ___________
Commission file number 0-14468.
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First Oak Brook Bancshares, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 36-3220778
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 Sixteenth Street, Oak Brook, Illinois 60521
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (630) 571-1050
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock ($2 par value)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 1997 was: $56,789,649 based upon the last sales price
of the registrant's Class A Common stock at $25.25 per share as reported by the
National Association of Securities Dealers Automated Quotation System.
The number of shares outstanding of each of the registrant's classes of common
stock as of March 15, 1997: 1,522,772 shares of Common Stock and 1,739,851
shares of Class A Common Stock.
Documents incorporated by reference: Portions of the Company's Annual Report to
Shareholders for the fiscal year ended December 31, 1996, and Proxy Statement
for its 1997 Annual Meeting of Shareholders to be filed on or about April 1,
1997 are incorporated by reference into Parts I., II. and III. hereof, to the
extent indicated in the Form 10-K Cross-Reference Index.
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Form 10-K Cross-Reference Index
Certain information required to be included in Form 10-K is also included in the
1996 Annual Report to Shareholders or in the Proxy Statement used in connection
with the 1997 Annual Meeting of Shareholders to be held on May 6, 1997. The
following Cross-Reference Index shows the page location in the 1996 Annual
Report or in the Proxy Statement of only that information which is to be
incorporated by reference into Form 10-K. All other sections of the 1996 Annual
Report or the Proxy Statement are not required in Form 10-K and should not be
considered a part thereof.
<TABLE>
<CAPTION>
1996 1996 1997
FORM ANNUAL PROXY
Item No. Part I 10-K REPORT STATEMENT
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<S> <C> <C> <C>
1. Business................................................ 2-11
Statistical Disclosure by Bank Holding Companies .... 6-18
2. Properties............................................. 11-13
3. Legal Proceedings....................................... 13
4. Submission of Matters to a Vote of Security Holders .... 13
Part II
5. Market for Registrant's Common Equity
and Related Stockholder Matters....................... 29-32,
34
6. Selected Financial Data................................. 6
7. Management's Discussion and Analysis of
Financial Condition and Results of Operation.......... 6-18
8. Financial Statements and Supplementary Data............. 19-33
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 14
Part III
10. Directors and Executive Officers of the Registrant .... 5
11. Executive Compensation.................................. 9-13
12. Security Ownership of Certain Beneficial
Owners and Management................................. 2-3
13. Certain Relationships and Related Transactions.......... 6
Part IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K............................... 16-19
Signatures.............................................. 20
</TABLE>
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PART I
ITEM 1. BUSINESS
General
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First Oak Brook Bancshares, Inc. ("the Company") was organized under Delaware
law on March 3, 1983, as a bank holding company under the Bank Holding Company
Act of 1956, as amended. The Company owns all of the outstanding capital stock
of Oak Brook Bank ("the Bank"), Oak Brook, Illinois, which is an Illinois state-
chartered bank. The bank has seven locations in DuPage County and two locations
in Cook County. A tenth location is under development in Aurora, Illinois,
located in DuPage County.
The Company has two classes of common stock, Class A Common stock and Common
stock. The Common stock is convertible into Class A Common at any time on a
one-for-one basis. The Company has authorized shares of Class A Common and
Common stock of 4,000,000 and 3,000,000, respectively.
As of December 31, 1996, the Company had total assets of $768,655,000; loans of
$420,164,000, deposits of $648,303,000, and shareholders' equity of $59,553,000.
The business of the Company consists primarily of the ownership, supervision and
control of its subsidiary bank. The Company provides its subsidiary bank with
advice, counsel and specialized services in various fields of financial, audit,
legal and banking policy and operations. The Company also engages in
negotiations designed to lead to the acquisition of other banks and closely
related businesses.
The Bank is engaged in the general retail and commercial banking business. The
services offered include demand, savings, and time deposits, corporate cash
management services, and commercial and personal lending products. In addition,
related products and services are offered including discount brokerage, mutual
funds and annuity sales, and foreign currency and precious metal sales. Oak
Brook Bank has a full service trust and land trust department.
The Bank originates the following types of loans: commercial, real estate (land
acquisition, development & construction, commercial mortgages, residential
mortgages and home equity), credit card and consumer installment loans. The
extension of credit inherently involves certain levels and types of risk
(general economic conditions, industry and concentration risk, interest rate
risk, and credit and default risk) which the Company prudently manages through
the establishment of lending, credit and asset/liability management policies and
procedures.
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Loans originated comply with the Bank's loan policies and governmental rules,
regulations and laws. While the subsidiary bank's loan policy varies for
different loan products, the policy generally covers such items as: percentages
to be advanced against collateral, blanket or specific liens, insurance
requirements, maximum terms, down payment requirements, debt-to-income ratio,
credit history and other matters of credit concern.
The Bank's loan policy grants limited loan approval authority to designated loan
officers. Where a credit request exceeds the loan officer's approval authority,
approval by a more senior lending officer and/or bank loan committee is
required. The loan policy sets forth those credit requests that, either because
of the amount and/or type, require the approval of the bank loan committee.
The chart that follows sets forth the credit risks, loan origination procedures,
underwriting standards and lien position generally associated with the Bank's
lending in each major loan category. The major loan categories are residential
real estate, including purchase money, refinance and home equity loans;
commercial real estate, including land acquisition, development and construction
loans; commercial loans; auto loans (direct and indirect); credit card loans and
student loans. These loans, except for credit cards, are made generally in the
Chicago Metropolitan area and are generally secured by collateral located in the
Chicago Metropolitan area.
The chart sets forth the information generally considered in approving each
category of loans. The collateral stated for each category is the collateral
generally required for these loans. Each loan is reviewed on its own merits and
the information set forth in the chart does not necessarily apply to each loan
within a category. The lien position (if any) and collateral documentation for
commercial loans, commercial real estate and construction loans are structured
specifically for each loan.
3
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<TABLE>
<CAPTION>
LOAN TYPE
YEAR END BAL. PRINCIPAL SIGNIFICANT MAJOR
(000's) CREDIT LOAN ORIGINATION UNDERWRITING
% OF LOANS RISKS DOCUMENTATION STANDARDS LIEN POSITION
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<C> <S> <C> <C> <C>
Commercial Borrower default Personal Determination of eligible and Unsecured:
- -Working capital Industry change financial ineligible receivables Companies with
- -Term General economic statements of Advances generally not to exceed significant net
conditions guarantors 80% of eligible collateral worth
Balance $40,895 Personal tax Annual credit review relative to debt
% 9.7% returns of Debt to tangible net worth normally and
guarantors less than 4 to 1 solid operating
Business Assessment of company's cash flow history
financial -net annual cash flow should be Secured:
statements, or tax 120% of the total estimated Blanket first lien
returns (if annual debt service (with a 100% on all
applicable) floor) business assets
Cash flow Maximum length of term loans (unmonitored or
projections generally 7 years with
Credit history Personal guaranties of owners of limited monitoring)
Mercantile reports closely held companies (full or Secured:
Supplier partial) Specific first
references Periodic monitoring of A/R lien on
Customer Periodic audit for asset based assets being
references loans financed
If applicable Loan covenant restrictions (including leases)
-Collateral -Other borrowings
valuation -Payment of dividends
-A/R, A/P listing -Limit on owner withdrawals
and aging -Sale of company
-Machinery, -Capital expenditures
furniture, -Debt to net worth limits
fixtures and -Minimum tangible net worth
equipment, Evidence of insurance
inventory lists
-Pre-loan audit
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Commercial Borrower default Personal Loans to appraised value generally Secured:
Mortgages Industry change financial not to exceed 80% (with a ceiling First mortgages
General economic statements of of 85%) Assignment of
Balance $63,394 conditions guarantors Assessment of property's cash flow rents/leases
% 15.1% Personal tax -net annual cash flow should be Security agreement
returns of 120% of the total estimated on fixtures
guarantors annual debt service (with a 100% Environmental
Business floor) indemnity agreement
financial Personal guaranties of owners (full
statements, or tax or partial)
returns (if Evidence of insurance
applicable) Tax and insurance reserves (if
Cash flow applicable)
projections
Credit history
Lender references
Appraisals
Environmental
assessments
Credit history of
tenants
Financial
information on
tenants
Review of leases
Market trends and
conditions
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</TABLE>
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<TABLE>
<CAPTION>
LOAN TYPE
YEAR END BAL. PRINCIPAL SIGNIFICANT MAJOR
(000's) CREDIT LOAN ORIGINATION UNDERWRITING
% OF LOANS RISKS DOCUMENTATION STANDARDS LIEN POSITION
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<S> <C> <C> <C> <C>
Land acquisition, Project Personal financial Land acquisition loan to value Secured:
development completion statements of guarantors generally not exceed 50% (with a First mortgages
and construction Borrower default Personal tax returns of ceiling of 65%) Assignment of
Industry change guarantors Land development loan to value rents/leases
Balance $35,902 Business financial generally not exceed 75% Assignment of unit
% 8.5% statements or tax returns Construction loan to value generally sale contracts
(if applicable) not exceed 75% (with a ceiling of Assignment of
Cash flow projections 85%) of retail value plans,
Credit history Assessment of project cash flow specifications
Industry experience and Disbursement escrows construction and
reputation Personal guaranties (full or partial) service contracts
Contractor references Evidence of insurance Assignment of
Lender references Inspection developers rights
Market trends and conditions Environmental
Project feasibility Residential subdivision projects indemnity agreement
-Market acceptance - Minimum unit release
-Project marketing strategy requirements for accelerated
-Engineering review payback
Appraisals - Interest reserves (if applicable)
Environmental assessments
Review of other current
projects by developer
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Residential Real
Estate
A) Portfolio Borrower default Application (including Debt to income generally not to Secured:
1) Purchase money -Reduction of financials) exceed 39% gross annual income -First mortgages
2) Refinance income Verification of employment Principal/interest/taxes/insurance
-Excessive debt and income less than 28% of gross annual
-Future death, Verification of deposits income
disability or (excluding home equity) Loan to value
B) Secondary divorce Collateral appraisal, -generally not to exceed 80% for
Market Decline in market generally two appraisals loans under $500,000
1) Purchase money value for property values in -generally not to exceed 65%
2) Refinance Completion of excess of $500,000 (ceiling of 75%) for loans
construction Credit history greater than $500,000
Insurance (flood, hazard)
Balance $93,730 Two year job history or employment
% 22.3% in related field.
No serious prior derogatory credit
history
No current delinquencies
Secondary market loans (additional
to above):
-Loan to value which exceed 80%
require private mortgage insurance
-Investor approval
C) Home equity Same as above Same as above Same as above -Primarily Second
mortgages
Balance $55,297
% 13.1%
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</TABLE>
5
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<TABLE>
<CAPTION>
LOAN TYPE
YEAR END BAL. PRINCIPAL SIGNIFICANT MAJOR
(000's) CREDIT LOAN ORIGINATION UNDERWRITING
% OF LOANS RISKS DOCUMENTATION STANDARDS LIEN POSITION
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<S> <C> <C> <C> <C>
Credit card Borrower default Application (with financials) Debt to income generally not to Unsecured
-Reduction of Credit history exceed 39% gross annual income
Balance $58,114 income Verification of employment No serious prior derogatory credit
% 13.8% -Excessive debt and income history
-Future death, Tax returns (if self No current delinquencies
disability or employed) Established credit
divorce Stable employment and residence
Fraud No excessive debt
No more than 9 active bank cards
Approved credit line proportionate to
income
Minimum income requirement
Student cards only:
No minimum income requirement
Established credit not required
No derogatory credit
No more than three active bank
cards
No more than $10,000 available in
credit lines
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Consumer
Installment
Auto (primarily Borrower default Application (with financials) Debt to income ratio generally not to Secured, recorded
indirect) -Reduction of Verification of employment exceed 45% of gross annual income lien on title
income Credit history No serious prior derogatory credit Single interest
Balance $59,211 -Excessive debt Evidence of insurance history insurance
% 14.1% -Future death, No current delinquencies
disability or Stable employment and residence
divorce Established credit unless down
Collateral value payment (greater than) 25%
decline
Casualty
Dealer New dealerships are submitted Direct:
-Business decline for credit approval New cars - loans generally not to
-Industry decline -Review dealers trade and exceed 80% of purchase price
-General references Used cars (generally not older than 4
economic -Review dealer financial years)-loans limited to 100% of
conditions statements NADA loan value
-Fraud -Mercantile report
-Annual review Indirect:
-Signed dealer agreement New cars-
-invoice up to $18,000, will finance
up to $500 over invoice
-invoice over $18,000, will finance
up to $1,000 over invoice
Used cars (generally not older than 4
years)-loans limited to 100% of
NADA loan
Student
Loss of Application Unsecured,
Balance $6,195 Government Government guaranty
% 1.5% guaranty
Other Various Various Various Various
Balance $8,165
% 1.9%
</TABLE>
6
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Competition
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The Company and its subsidiary bank operate primarily in DuPage County,
Illinois, with seven locations, and two locations in Cook County, Illinois, one
of which is located in western Cook County and the other on Chicago's North
Shore.
At June 30, 1996, the Company's seven DuPage County, Illinois, offices held $528
million in deposits for an approximate 5.3% market share in relation to the
total deposits in DuPage County commercial banks. The Company's two offices in
Cook County, Illinois, contained $77 million in deposits for an approximate .1%
market share of Cook County. The Company's offices are part of the Chicago
banking market, as defined by the Federal Reserve Bank of Chicago, consisting of
Cook, DuPage and Lake Counties, which at June 30, 1996, had $98.0 billion in
deposits.
The Company's subsidiary bank is located in a highly competitive market facing
competition for deposits, loans and other banking services from many financial
intermediaries, including savings and loan associations, finance companies,
credit unions, mortgage companies, retailers, stockbrokers, insurance companies,
mutual funds and investment companies, many of which have greater assets and
resources than the Company.
Regulation and Supervision
- --------------------------
General
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The Company is a bank holding company subject to the restrictions and
regulations adopted under the Bank Holding Company Act of 1956, as amended (the
"BHCA"), and interpreted by the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"), and the Company is also subject to Federal
Securities Laws and Delaware Law. The BHCA requires every bank holding company
to obtain the prior approval of the Federal Reserve Board before acquiring
direct or indirect ownership or control of 5% or more of the voting shares of
any bank or bank holding company. However, no acquisition may be approved if it
is prohibited by applicable state law. The Company is examined by the Federal
Reserve Bank of Chicago.
The subsidiary bank is subject to extensive governmental regulation and periodic
regulatory reporting requirements. The regulations by various governmental
entities, as well as Federal and State laws of general application affect the
Company and the subsidiary bank in many ways including but not limited to:
requirements to maintain reserves against deposits, payment of FDIC insurance,
restrictions on investments, establishment of lending limits and payment of
dividends. The subsidiary bank is primarily supervised and examined by the
Illinois Office of Banks
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and Real Estate and the Federal Deposit Insurance Corporation ("FDIC").
The Federal Reserve Bank examines and supervises bank holding companies pursuant
to risk-based capital adequacy guidelines. These guidelines establish a uniform
capital framework that is sensitive to risk factors, including off-balance sheet
exposures, for all federally supervised banking organizations. This can impact
a bank holding company's ability to pay dividends and expand its business
through the acquisition of subsidiaries if capital falls below the levels
established by these guidelines. As of December 31, 1996 the Company's Tier 1,
total risk-based capital and leveraged ratios were in excess of minimum
regulatory guidelines and also exceed the FDIC criteria for "well capitalized"
banks. See the Company's Annual Report at page 30 for a more detailed
discussion of the Risk Based Assessment System and the impact upon the Company
and its subsidiary bank.
Federal Deposit Insurance
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Under Federal law, the FDIC has authority to impose special assessments on
insured depository institutions, to repay FDIC borrowings from the United States
Treasury or other sources, and to establish semi-annual assessment rates for
Bank Insurance Fund ("BIF") member banks to maintain the BIF at the designated
reserve ratio required by law. Effective January 1, 1997 the FDIC Assessment
Rate Schedule for BIF members ranged from zero for "well capitalized"
institutions to $.27 per $100 for "undercapitalized" institutions as set forth
in the following table:
<TABLE>
<CAPTION>
BIF RATES
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Supervisory Subgroup
Capital ----------------------------------
Group A B C
------- --------- --------- ---------
<S> <C> <C> <C>
Well capitalized 0(c) 3(c) 17(c)
Adequate 3 10 24
Under capitalized 10 24 27
</TABLE>
Pursuant to the Deposit Insurance Fund Act of 1996 ("Funds Act"), the FDIC
eliminated the $2,000 minimum annual assessment and in 1996 refunded to BIF
institutions the fourth quarter minimum assessment.
The Funds Act also authorized the Financing Corporation ("FICO") to levy annual
assessments of BIF-assessable deposits to service FICO bond obligations. On
January 2, 1997 the Company's subsidiary bank was assessed $19,400 for its
semiannual FICO payment. The BIF assessment must equal 1/5 of the FICO
assessment rate that is applied to deposits assessable by the Savings
Association Insurance Fund ("SAIF"). The annual assessment rates for FICO were
determined from the September 30,
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1996 call reports and for BIF institutions the rate was 1.296c per $100.
The subsidiary bank is not restricted by the limitations on Brokered Deposits
and can pass-through the $100,000 FDIC insurance coverage to each participant in
or beneficiary of a qualified employee benefit plan.
The Riegle/Neal Interstate Banking and Branching Efficiency Act of 1994 ("The
- -----------------------------------------------------------------------------
Interstate Banking Act")
- ------------------------
The Interstate Banking Act allowed "adequately capitalized" and "adequately
managed" bank holding companies to acquire banks in any state as of September
29, 1995. The Act also allows interstate merger transactions after June 1,
1997.
The Interstate Banking Act amends Section (d) of the Bank Holding Company Act of
1956 authorizing the Federal Reserve to approve a bank holding company's
application to acquire either control or substantial assets of a bank located
outside of the bank holding company's home state regardless of whether the
acquisition would be prohibited by state law. The Federal Reserve may approve
these transactions only for "adequately capitalized" and "adequately managed"
bank holding companies.
The Interstate Banking Act also amended the Federal Deposit Insurance Act and
beginning June 1, 1997 responsible agencies may approve merger transactions
between insured banks with different home states regardless of whether the
transaction is prohibited under state law. Through interstate merger
transactions, banks will be able to acquire branches of out of state banks by
converting their offices into branches of the resulting bank. The Act provides
that it will be the exclusive means for bank holding companies to obtain
interstate branches. In these transactions, the resulting bank must remain
"adequately capitalized" and "adequately managed" upon completion of the merger.
The Act also states that a home state may enact a law preventing these
transactions; Illinois will allow these transactions effective June 1, 1997.
Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA")
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The FIRREA has broadened the regulatory powers of federal bank regulatory
agencies. One of the provisions of FIRREA contains a "cross-guarantee"
provision which could impose liability on the Company for losses incurred by the
FDIC in connection with assistance provided to or the failure of any of the
Company's insured depository institutions. The U.S. Court of Appeals Second
Circuit recently upheld the FDIC's power to charge losses from a bank failure to
another bank in the same corporate organization. The Company, under Federal
Reserve Board policy,
9
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is a source of financial strength to its subsidiary bank and is expected to
commit resources to support the subsidiary bank. As a result, the Company could
be required to commit resources to its subsidiary bank in circumstances where it
might not do so absent such policies.
Comprehensive Environmental Response Compensation and Liability Act ("CERCLA")
- ------------------------------------------------------------------------------
In 1992 the U.S. Environmental Protection Agency ("USEPA") adopted the CERCLA
which provided lenders with an exemption from liability if the lender did not
participate in the management of the contaminated property. The Secured Lender
Exemption Rule protected secured lenders from CERCLA liability if they did not
exercise significant control over the borrowers day-to-day operations and did
not fail to foreclose and promptly dispose of the contaminated property.
However, the Third Circuit Court of Appeals decision in Frank J. Kelley,
Attorney General for the State of Michigan, v. Environmental Protection Agency,
Chemical Manufactures Association v. Environmental Protection Agency, 15 F. 3d
1100 (D.C. Cir. 1994) ("Kelley") invalidated the secured lender exemption, and
the U.S. Supreme Court denied the appeal.
In response to the Kelley decision, CERCLA was amended by The Economic Growth
and Regulatory Paperwork Reduction Act of 1996. The CERCLA amendment excludes
lenders that hold ownership to property primarily to protect a security interest
(unless the lender actually participates in the management or operational
affairs of the property instead of merely having the capacity to influence or
has unexercised rights to control property operations) from the definition of
"owner or operator" and are therefore exempt from liability for environmental
cleanups.
The state of Illinois amended its Innocent Landowner Law to protect lenders and
purchasers from environmental clean up liabilities. The law provides "innocent
landowner" protection for lenders and purchasers who perform Phase I and Phase
II environmental assessments or audits meeting the statutory requirements. This
law will protect the banks from prosecution by the Illinois Environmental
Protection Agency.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
- ----------------------------------------------------------------------------
The FDICIA significantly expanded the regulatory and enforcement powers of
federal banking regulators. FDICIA gives federal banking regulators
comprehensive directions to promptly direct or require the correction of
problems of inadequately capitalized banks in a manner that is least costly to
the Federal Deposit Insurance Fund. The degree of corrective regulatory
involvement in the operations and management of banks and their holding
companies will be largely determined by the actual or anticipated
10
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capital position of the institution. See the Company's Annual Report pages 18
and 30 detailing the Company's capital position.
FDICIA also directs federal banking regulatory agencies to issue new safety and
soundness standards governing operational and managerial activities of banks and
their holding companies particularly in regard to internal controls, loan
documentation, credit underwriting, interest rate exposure, asset growth and
executive compensation. The following regulations were passed to implement some
of the above objectives:
. In September, 1996, the Federal Banking Agencies amended the Uniform
Financial Institutions Rating System, effective January 1, 1997, to include
sensitivity to market risks. Market risks reflect the degree to which
changes in interest rates and other market rates can affect a financial
institution's assets, earnings, liabilities and capital values. If the
regulators determine a bank is in a high risk position, additional capital
may be required. The Company and its subsidiary bank, on a regular basis,
monitor and establish policy limits on interest rate risk.
Other Laws and Regulations
- --------------------------
Proposals that change the laws and regulations governing banks, bank holding
companies and other financial institutions are discussed in Congress, the state
legislatures and before the various bank regulatory agencies. Banks are subject
to a number of federal and state laws and regulations which have a material
impact on their business. These include, among others, state usury laws,
consumer protection laws and regulations, (e.g., the Truth in Lending Act, the
Equal Credit Opportunity Act, the Expedited Funds Availability Act, the
Community Reinvestment Act, the Truth in Savings Act), as well as the electronic
funds transfer laws, Bank Secrecy Act, environmental laws and privacy laws.
Statistical Disclosure by Bank Holding Companies
- ------------------------------------------------
See "Financial Review" on pages 6 through 18, inclusive, of the Company's 1996
Annual Report to Shareholders, which is incorporated herein by reference for the
statistical disclosure by bank holding companies.
ITEM 2. PROPERTIES
The Company's offices are located in Oak Brook, Illinois. The subsidiary bank
and its branches conduct business in both owned and leased premises. The
Company believes its facilities are suitable and adequate to operate its banking
business. For information concerning lease obligations, see Note 6 of the Notes
11
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to Consolidated Financial Statements and lease exhibits previously filed and
incorporated by reference.
The Company and Oak Brook Bank occupy space in a five-year old, three-story,
100,000 square foot, modern office building located at 1400 Sixteenth Street,
Oak Brook, Illinois, which is owned and operated by Oak Brook Bank. The first
and second floors and portions of the third floor and lower level are occupied
by Oak Brook Bank. The Company leases a small portion (1,700 square feet) from
Oak Brook Bank. A portion of the third floor is rented to third parties.
Oak Brook Bank began developing a new branch in Aurora, Illinois during the
first quarter of 1997. The traditional style building will be approximately
4,400 square feet, constructed of brick with a slate roof and accentuated by a
clock tower. This location will offer a drive-up facility and is expected to
open in the first quarter of 1998.
In addition, Oak Brook Bank operates the following branches:
Addison - A 25 year old, 14,500 square foot, two-story brick, colonial
building including a full basement and attached drive-up facility in
Addison, Illinois. The second floor is rented to third parties. This
facility and real estate are owned by Oak Brook Bank and was formerly the
Heritage Bank of Addison, acquired September, 1974.
Bensenville - Approximately 2,000 square feet of leased space in a modern,
two-story glass bui lding in Bensenville, Illinois. Opened in May, 1986.
Broadview - A 43 year old, 6,955 square foot, one-story brick building in
Broadview, Illinois. This facility and real estate are owned by Oak Brook
Bank. Formerly Liberty Bank acquired March, 1991.
Broadview Drive-up - Oak Brook Bank also owns a detached one-story drive-up
facility across the street from the Broadview location.
Burr Ridge - Approximately 6,600 square feet of leased space in a one-
story contemporary building located in Burr Ridge, Illinois. A portion of
this space is used for record storage. Opened in October, 1988.
Glenview - Approximately 1,800 square feet of leased space in a strip
shopping center in Glenview, Illinois. Opened in March, 1990.
12
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Lisle - Approximately 1,300 square feet of leased space in a neighborhood
shopping center in a primarily residential section of Lisle, Illinois. A
detached drive-up automated teller machine is also operated at this
location. Opened in October, 1985.
Naperville - A 2,400 square foot, two-story contemporary Palladian-style
building with a full basement and attached drive-up facility in Naperville,
Illinois. This facility is owned by Oak Brook Bank. Opened in June, 1988.
Warrenville - Approximately 4,400 square feet of leased space on the first
floor of a two-story tudor-style building with a full basement and attached
drive-up facility in Warrenville, Illinois. Formerly Warrenville Bank &
Trust acquired April, 1983.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiary bank were not subject to any pending or
threatened legal actions as of December 31, 1996. No such actions have arisen
subsequent to year-end.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders during the fourth
quarter of this year.
13
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
See page 34 and Notes 9, 12 and 13 of the Notes to Consolidated Financial
Statements on pages 29 through 32, inclusive, of the Company's 1996 Annual
Report to Shareholders which is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
See "Earnings Summary and Selected Consolidated Financial Data" on page 6 of the
Company's 1996 Annual Report to Shareholders, which is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
See "Financial Review" on pages 6 through 18, inclusive, of the Company's 1996
Annual Report to Shareholders, which is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and related notes are on pages 19 through
33, inclusive, of the Company's 1996 Annual Report to Shareholders, which is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Directors and Executive Officers" on page 5 of the Company's Proxy
Statement to be filed on or before April 1, 1997, which is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
See "Summary Compensation Table" and footnotes, "Five Year Performance
Comparison" and "Aggregated Option Exercises and Year-End Option Values Table"
and "Option Grants Table" on pages 9 through 14, inclusive, of the Company's
Proxy Statement to be filed on or before April 1, 1997, which is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See "Information Concerning Security Ownership of Certain Beneficial Owners and
Management" on pages 2 and 3 of the Company's Proxy Statement to be filed on or
before April 1, 1997, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Certain Transactions" on page 6 of the Company's Proxy Statement to be
filed on or before April 1, 1997, which is incorporated herein by reference.
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ANNUAL REPORT
PAGE
----
(a) 1. The following financial statements are
filed as part of this report:
Annual Report to Shareholders -
Report of Independent Auditors 19
Consolidated Balance Sheets - December 31, 1996
and 1995 20
Consolidated Statements of Income for the Three
Years Ended December 31, 1996 21
Consolidated Statements of Changes in
Shareholders' Equity for The Three Years Ended
December 31, 1996 22
Consolidated Statements of Cash Flows for the
Three Years Ended December 31, 1996 23
Notes to Consolidated Financial Statements 24-33
2. Financial statement schedules: All schedules are omitted as they are not
applicable or information is included in the consolidated financial
statements or the notes thereto.
(b) The following Reports on Form 8-K were filed during the last quarter of the
period covered by this report: None
(c) The following exhibits are included herein:
Exhibit (3) Articles of Incorporation including Amendments thereto
and By Laws of First Oak Brook Bancshares, Inc.
(Exhibit 3 to the Company's Form 10-K Annual Report for
the year ended December 31, 1994, incorporated herein
by reference).
Exhibit (10.1) Loan Agreement between First Oak Brook Bancshares, Inc.
and LaSalle National Bank dated December 1, 1991 and
amendments dated January 31, 1993 and March 31, 1994.
(Exhibit 10.1 to the Company's Form 10-K Annual Report
for the year ended December 31, 1994, incorporated
herein by reference).
16
<PAGE>
Exhibit (10.2) Lease Agreement between First Oak Brook Bancshares,
Inc. and Oak Brook Bank dated November 8, 1991.
(Exhibit 10.2 to the Company's Form 10-K Annual Report
for the year ended December 31, 1994, incorporated
herein by reference).
Exhibit (10.3) Data Processing Agreement between First Data Resources
Inc. and Oak Brook Bank dated November 22, 1991.
(Exhibit 10.3 to the Company's Form 10-K Annual Report
for the year ended December 31, 1994, incorporated
herein by reference.) Amendment thereto dated June 19,
1996, filed herewith.
Exhibit (10.4) First Oak Brook Bancshares, Inc. Employees' Stock Bonus
Plan as amended and restated effective July 19, 1994.
(Exhibit 10.4 to the Company's Form 10-K Annual Report
for the year ended December 31, 1994, incorporated
herein by reference).
Exhibit (10.5) First Oak Brook Bancshares, Inc. Amended and Restated
1987 Stock Option Plan effective September 21, 1987.
(Exhibit 10.5 to the Company's Form 10-K Annual Report
for the year ended December 31, 1994, incorporated
herein by reference).
Exhibit (10.6) Lease Agreement between Oak Brook Bank, not personally,
but solely as Trustee under Trust Agreement dated
August 1, 1989 and known as Trust Number 2200 and Life
Investors Insurance Co. of America, an Iowa
Corporation, for Suite 300 of the Oak Brook Bank
Building. (Exhibit 10.6 to the Company's Form 10-K
Annual Report for the year ended December 31, 1994,
incorporated herein by reference).
17
<PAGE>
Exhibit (10.7) Lease Agreement between Oak Brook Bank, not personally,
but solely as Trustee under Trust Agreement dated
August 1, 1989 and known as Trust Number 2200 and CB
Commercial Real Estate Group, Inc., a Delaware
Corporation, for Suite 301 of the Oak Brook Bank
Building. (Exhibit 10.7 to the Company's Form 10-K
Annual Report for the year ended December 31, 1994,
incorporated herein by reference).
Exhibit (10.8) License Agreement, between Jack Henry & Associates,
Inc. and First Oak Brook Bancshares, Inc. dated March
10, 1993. (Exhibit 10.8 to the Company's Form 10-K
Annual Report for the year ended December 31, 1994,
incorporated herein by reference).
Exhibit (10.9) Form of Transitional Employment Agreement for Eugene P.
Heytow, Richard M. Rieser, Jr. and Frank M. Paris.
(Exhibit 10.9 to the Company's Form 10-K Annual Report
for the year ended December 31, 1994, incorporated
herein by reference).
Exhibit (10.10) Form of Transitional Employment Agreement for Senior
Officers. (Exhibit 10.10 to the Company's Form 10-K
Annual Report for the year ended December 31, 1994,
incorporated herein by reference).
Exhibit (10.11) Form of Agreement Regarding Post-Employment Restrictive
Covenants for Eugene P. Heytow, Richard M. Rieser, Jr.
and Frank M. Paris. (Exhibit 10.11 to the Company's
Form 10-K Annual Report for the year ended December 31,
1994, incorporated herein by reference).
Exhibit (10.12) Form of Supplemental Pension Benefit Agreement for
Eugene P. Heytow. (Exhibit 10.12 to the Company's Form
10-K Annual Report for the year ended December 31,
1994, incorporated herein by reference).
18
<PAGE>
Exhibit (10.13) Form of Supplemental Pension Benefit Agreement for
Richard M. Rieser, Jr. (Exhibit 10.13 to the Company's
Form 10-K Annual Report for the year ended December 31,
1994, incorporated herein by reference).
Exhibit (10.14) Senior Executive Insurance Plan. (Exhibit 10.14 to the
Company's Form 10-K Annual Report for the year ended
December 31, 1995, incorporated herein by reference).
Exhibit (10.15) First Oak Brook Bancshares, Inc. Performance Bonus Plan
(Amended and Restated).
Exhibit (13) Annual Report to Shareholders.
Exhibit (21) Subsidiary of the Registrant.
Exhibit (23) Consent of Ernst & Young LLP.
Exhibit (27) Financial Data Schedule.
Exhibits 10.9 through 10.15 are management contracts or compensatory plans or
arrangements required to be filed as an Exhibit to this Form 10-K pursuant to
Item 14(c) hereof.
19
<PAGE>
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 17, 1997
------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/S/EUGENE P. HEYTOW Chairman of the Board March 17, 1997
- --------------------------- and Chief Executive
Eugene P. Heytow Officer
/S/FRANK M. PARIS Vice Chairman of March 17, 1997
- --------------------------- the Board
Frank M. Paris
/S/RICHARD M. RIESER, JR. President, March 17, 1997
- --------------------------- Assistant Secretary,
Richard M. Rieser, Jr. and Director
/S/ALTON WITHERS Director March 17, 1997
- ---------------------------
Alton Withers
/S/MIRIAM LUTWAK FITZGERALD Director March 17, 1997
- ---------------------------
Miriam Lutwak Fitzgerald
/S/GEOFFREY R. STONE Director March 17, 1997
- ---------------------------
Geoffrey R. Stone
/S/ROBERT WROBEL Director March 17, 1997
- ---------------------------
Robert Wrobel
/S/ROSEMARIE BOUMAN Vice President, Chief March 17, 1997
- --------------------------- Financial Officer,
Rosemarie Bouman Treasurer (Principal
Accounting Officer)
20
<PAGE>
EXHIBIT (10.3)
FIFTH AMENDMENT TO SERVICE AGREEMENT
This Fifth Amendment to Service Agreement made and entered into this 23rd
day of December, 1996 by and between Oak Brook Bank, 1400 Sixteenth Street, Oak
Brook, Illinois 60521 ("Buyer") and First Data Resources Inc., 7301 Pacific
Street, Omaha, Nebraska 68114 ("FDRI").
WITNESSETH:
WHEREAS, Buyer and FDRI heretofore entered into a Service Agreement dated
as of November 22, 1991 as amended by Amendments to Service Agreement dated
September 2, 1994, March 1, 1996, March 1, 1996 and June 19, 1996 (the "Service
Agreement"); and
WHEREAS, Buyer and FDRI now desire to amend the Service Agreement as
hereinafter more particularly set forth;
NOW THEREFORE, Buyer and FDRI hereby agree as follows:
1. Exhibit "B", Section II - a of the Service Agreement, Item "7619 -
Plasticard Agent/Strategy Inserting Set-Up" is hereby amended to read as
follows, effective December 23, 1996:
"7619 Plasticard Agent/Strategy Inserting Set-Up $4.5000/set-up"
2. As hereby amended and supplemented, the Service Agreement shall remain
in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Service Agreement the day and year first above written.
FIRST DATA RESOURCES INC. OAK BROOK BANK
By: /s/HAROLD E. EVAN By: /s/ ROSEMARIE BOUMAN
----------------------- ---------------------------
Title: EVP-Client Services Title: Chief Financial Officer
-------------------- ------------------------
<PAGE>
EXHIBIT (10.15)
FIRST OAK BROOK BANCSHARES, INC.
PERFORMANCE BONUS PLAN
(Amended and Restated)
Article 1. Establishment, Purpose and Duration
The First Oak Brook Bancshares, Inc. Bonus Plan (the "Plan") is hereby
established by First Oak Brook Bancshares, Inc. (the "Company"). The purpose of
the Plan is to promote the success and enhance the value of the Company by
providing the Executive Officers with the opportunity to earn additional bonus
compensation based upon superior Company performance. The Plan and the grant of
awards hereunder are expressly conditioned upon the Plan's approval by the
stockholders of the Company. The Plan is adopted, subject to stockholder
approval, effective as of January 1, 1996, and shall remain in effect, subject
to the right of the Board of Directors to amend or terminate the Plan at any
time, until December 31, 2000.
Article 2. Administrator
The Plan shall be administered by the Stock Option Advisory Committee of
the Board of Directors of the Company, or such other committee designated by the
Board comprised solely of two or more members who are "outside directors" with
the meaning of Section 162(m) of the Code (the "Committee").
Article 3. Eligibility
Only those executive officers selected by the Committee shall be eligible
to participate in the Plan. References herein to an "executive officer" shall
refer to only those executive officers who have been selected for participation
in the Plan.
Article 4. Awards
No later than March 31 of each calendar year, the Committee shall establish
a minimum, maximum and range of targets (the "Targets") for the calendar year
based on the Company's return on equity, return on assets, net income, market
price of Company's Class A Common Stock relative to book value, market price of
such Common Stock, and level of non-performing assets, in each case relative to
peer institution performance, historical levels and/or other standards deemed
appropriate by the Committee in light of the Company's objectives. The
Committee shall also determine the bonus compensation awards which may be earned
by the executive officers upon the Company's attainment of various levels of
performance with respect to such Targets ("Award Opportunities"); provided, that
no bonus shall be earned unless minimum performance with respect to at least
three Targets is met for the calendar year. All Award Opportunities shall be a
direct function of the
22
<PAGE>
Targets.
No bonus shall be paid with respect to any calendar year, if, as of
December 31 of such year, there has been an adverse change in the Company's
regulatory status or capital position as determined by reference to standards
relating to regulatory status and capital position established by the Committee
at the time it established the Targets for such year.
Promptly after each calendar year, the Committee shall certify as to
whether any, all or a combination of the Targets for such year have been
achieved; provided, that the Committee may, in its absolute discretion and based
upon performance levels achieved through November 30 of a calendar year, certify
achievement of all or any combination of the Targets and authorize payment of a
portion of the bonus then expected to be earned. Following the post-year end
certification, a final award shall be computed for each executive officer based
upon the Award Opportunities for such year; provided, however, that any amount
paid to the executive officer during such year pursuant to the first sentence of
this paragraph shall be deducted from the final full-year award otherwise
payable. In addition, the Committee may, in its sole discretion, decrease, but
not increase, the amount of any award payable under the Plan.
Notwithstanding the foregoing, no executive officer may receive, with
respect to any calendar year, payments under the Plan aggregating more than two
times such executive officer's base annual salary as in effect on the first day
of such calendar year.
Article 5. Payouts
All awards shall be paid in cash.
Article 6. Termination
In the event an executive officer's employment is terminated by reason of
death, disability or retirement or by the Company without cause, he shall
receive a prorated payment, which shall be determined by the Committee, in its
sole discretion, based upon the length of time he was included in the Plan
during the calendar quarter and year then in progress. In the event the
executive officer's employment is terminated for any other reason, all his
rights to an award for the year then in progress shall be forfeited.
Article 7. Amendment
The Plan may be amended, modified or terminated by the Board of Directors
of the Company, subject to the approval of the stockholders of the Company if
required for compliance with Section 162(m) of the Internal Revenue Code of
1986, as amended.
23
<PAGE>
Article 8. Withholding
The Company shall have the power and the right to deduct or withhold, or
require the executive officer to remit to the Company, an amount sufficient to
satisfy Federal, state and local taxes (including the executive officer's FICA
obligations) required by law to be withheld with respect to any taxable event
arising as a result of the Plan.
Article 9. Beneficiaries
The Committee shall establish such procedures as it deems appropriate for
the executive officer to designate a beneficiary or beneficiaries to whom any
amounts payable in the event of the executive officer's death are to be paid.
Article 10. Miscellaneous
The headings contained in the Plan are for reference purposes only and
shall not affect the meaning or interpretation of the Plan.
If any provision of the Plan shall for any reason be held to be invalid or
unenforceable, such invalidity or unenforceability shall not effect any
provision hereby, and the Plan shall be construed as if such invalid or
unenforceable provision were omitted.
The Plan shall inure to the benefit of and be binding upon each successor
and assign of the Company. All obligations imposed upon the executive officers,
and all rights granted to the Company hereunder, shall be binding upon the
executive officer's heirs, legal representatives and successors.
The Plan and all awards made and actions taken hereunder shall be governed
by and construed in accordance with the laws of the State of Illinois (other
than its law respecting choice of law).
24
<PAGE>
First Oak Brook Bancshares, Inc.
Annual Report 1996
<PAGE>
First Oak Brook Bancshares, Inc., in Brief
- --------------------------------------------------------------------------------
Our Business
First Oak Brook Bancshares, Inc. is the 11th largest, independent publicly-held
bank holding company headquartered in Illinois. Organized in 1983 and publicly-
traded since 1985, its primary business is the ownership and control of Oak
Brook Bank, an Illinois-chartered commercial bank. The Company employs 284 full-
time equivalent employees.
Oak Brook Bank offers full-service banking, trust and investment management
and related financial services through a network of nine offices in suburban
Chicagoland.
Our Markets
The Company is headquartered and its largest banking office is located in Oak
Brook, Illinois, twenty miles west of downtown Chicago. Eight of its offices are
located in the western suburbs of Chicago, seven of which are in DuPage County.
DuPage, the second largest county in Illinois, has a population of approximately
853,000 and enjoys the highest median household income in the state. Its other
office is located on Chicago's affluent North Shore. In addition, the Company
markets its products and services through local advertising and, in the case of
its credit card programs, also through national advertising and promotional
activities.
- --------------------------------------------------------------------------------
Table of Contents
1 Financial Highlights
2 Letter to Shareholders
6 Financial Review
19 Report of Independent Auditors
20 Consolidated Financial Statements
24 Notes to Consolidated Financial Statements
34 Corporate and Shareholder Information
- --------------------------------------------------------------------------------
<PAGE>
Financial Highlights
First Oak Brook Bancshares, Inc. and Subsidiary
<TABLE>
<CAPTION>
(Dollars in thousands except per share amounts) 1996 1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings
Net income...................................... $ 7,107 $ 6,692 $ 6,194
Per Share
Net income...................................... $ 2.06 $ 1.95 $ 1.81
Book value at year-end.......................... 17.26 15.64 13.17
Market price at year-end........................ 23.25 20.63 17.25
Cash dividends paid
Class A common................................ .380 .315 .276
Common........................................ .315 .263 .222
Year-End Balances
Total assets.................................... $768,655 $678,102 $634,705
Loans, net of unearned discount................. 420,164 362,728 309,681
Demand deposits................................. 147,497 128,236 109,237
Total deposits.................................. 648,303 555,086 513,623
Shareholders' equity............................ 59,553 53,762 42,909
Asset Quality
Nonperforming loans to total loans.............. .49% .03% .21%
Allowance for loan losses to total loans........ .98% 1.08% 1.25%
- ----------------------------------------------------------------------------------
</TABLE>
1
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
You might say 1996 was a triumph of determination over destiny. At times we
felt like a victim of the robust economy. On the one hand, our bank had to
compete with the raging stock market for depositors' dollars; on the other, we
had to fight toe to toe with all sorts of lenders to put those deposits to work.
Nevertheless, we did quite well in 1996, thanks to the strenuous efforts of
our entire staff, and profits rose for the fifth consecutive year. We earned
$7.1 million, or $2.06 a share, up 6%, in spite of the squeeze on our margins.
We ended the year with $769 million in assets (up from $678 million) and $59.6
million in equity (up from $53.8 million) - both record highs.
With our solid earnings and strong capital, we were able prudently to raise
our dividends twice in 1996, once in July and again in October. The dividends on
our NASDAQ-listed Class A Common stock, when annualized, are currently paid at
the rate of $0.52 per share, up from $0.36 a year ago. Our Class A Common
dividends have increased at a compounded rate of 20% over the last five-year
period.
Our stock price also gained nicely. Our Class A Common stock value rose 13%
from year to year. For six consecutive years, the Company has achieved double-
digit stock price increases.
On the deposit gathering side, our biggest triumph was Commercial Banking,
where the high quality of our cash-management technology and sales and support
personnel led to a jump in checking deposits and a boost in related fee income.
On the loan side, we had several winners. One was auto loans generated
through car dealers. By building stronger relationships with dealerships, paying
close attention to pricing, turning around loans fast, and applying consistent
buying policies, our volume grew to $57.8 million at
2
<PAGE>
- --------------------------------------------------------------------------------
year end, from $38.4 million the year before - a 51% increase. At the same time,
we maintained our yields and, remarkably, had only 3 repossessions and no losses
among 4,850 loans.
Another winner was in Home Lending. Our home equity loan portfolio grew
because of lower rates on larger lines. And our first mortgage portfolio and
mortgage origination fees were up thanks to good prices. And, both kinds of
loans had the benefit of catchy advertising. For example, if you listen to radio
in Chicago, you may have noticed how much time your President has been spending
in the vault lately, visiting the money, thinking he'd like to put more of it in
the hands of people who need home loans.
Commercial Real Estate had another banner year resulting from a decade of
intense effort to build our reputation as a consistent, conservative lender for
home builders, developers and other commercial, industrial and multi-family
property owners.
Moreover, our Trust and Investment business continued to expand rapidly. At
year-end, our Trust Department held investment discretion over $91 million in
assets, up from $68 million a year earlier. Much of this growth stems from
successful investment strategies, including an affordable mutual fund asset
allocation program. This coming year promises strong revenue increases - from
business opened last year and from new business being developed by our first
full-time marketing officer.
In addition to great opportunities, we encountered some daunting
challenges. In the Trust Department, for instance, the challenge is to convert
our asset growth into meaningful profits, as labor and technology costs rise
with demand for more service and ever improving results. We are now focusing on
greater efficiency and profitability.
In Commercial Lending, while loans grew a bit, the output didn't
3
<PAGE>
- --------------------------------------------------------------------------------
match the effort. Our competitors soliciting small and middle-market business
loans are taking more credit risks (for instance, by eliminating personal
guaranties), lowering rates, and lengthening terms. In response to these
pressures, we are carefully marketing to larger, high-quality prospects and
redeploying some staff.
In our Credit Card Department - still a high-return business - the
challenge is two-fold: First, losses, although still well below those of our
peers, crept up in 1996. Second, growth in the credit card business is harder to
come by. Our portfolio consists of many affluent consumers, initially attracted
to our low-rate, no-fee or low-fee offers. Today, rebate cards and low teaser
rates have lured some of them away. The question confronting us is how to
position ourselves in this competitive market.
No greater challenge, and no greater opportunity for positive change,
exists today than in our Retail Banking Department. While we are pleased to
serve thousands of deposit-generating consumers, we are humbled by the thought
of a few of our competitors, each with hundreds of thousands. We're not big
enough to profit just by having lots of customers, so, we must grow through
deeper relationships with the top tiers of our retail customers and by serving
all customers with greater efficiency. What we refer to as "self-service
banking" is the key to gaining these efficiencies. We already share a
convenient, wide-area ATM network; operate an automated voice response unit
providing our customers with current account data; and maintain an Internet
site. In 1996, we installed our E-Z Teller system to increase the speed and
accuracy of live transactions, and we opened - very successfully - our 7-day-a-
week Loan-by-Phone center. In 1997, we'll be taking two further steps to improve
our retail distribution system: First, we'll be introducing on-line banking
through the Internet, the one bank-by-computer system which eliminates the need
to load special
4
<PAGE>
- --------------------------------------------------------------------------------
software onto your P.C. And second, we'll be expanding our Loan-by-Phone system
into a full-time Call Center, consolidating our customer service and
telemarketing.
At the same time, we retain a long-standing commitment to serving customers
face-to-face in our branches. In fact, we're so optimistic about the future of
well-located "brick and mortar" bank offices that we will open in late Fall a
new one in the Stonebridge community of Aurora, west of Fox Valley Mall. We are
also actively looking at additional sites targeted at providing convenient
banking to businesses and consumers in the affluent western suburbs of Chicago.
And to maximize the value of our branches, we will be focusing branch marketing
on sizeable, nearby commercial businesses.
Separately, we'd like to congratulate Bill Daley, previously Vice-Chairman
of Oak Brook Bank, on his recent appointment as U.S. Secretary of Commerce. We
know he'll provide the same leadership and wisdom to the country as he did to
our bank.
With increased shareholder value as our primary objective, we're
methodically reviewing some of our long-held assumptions and approaches. One
change should be of particular interest: we recently announced a stock buy-back
program.
We don't expect miracles. But we do expect, through diligence, astuteness
and good will, to fortify and expand our solid position in the marketplace
little by little. Over time, we intend to emerge bigger, stronger and more
profitable than ever.
/s/ Eugene P. Heytow
- ---------------------
Eugene P. Heytow
Chairman of the Board
/s/ Richard M. Rieser, Jr.
- --------------------------
Richard M. Rieser, Jr.
President
/s/ Frank M. Paris
- ------------------
Frank M. Paris
Vice Chairman
5
<PAGE>
Financial Review
First Oak Brook Bancshares, Inc. and Subsidiary
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Earnings Summary and Selected Consolidated Financial Data At and for the Year Ended December 31,
----------------------------------------------------
(Dollars in thousands except per share data) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data
Net Interest Income...................................... $ 26,834 $ 25,476 $ 24,296 $ 21,315 $ 18,156
Provision for Loan Losses................................ 1,510 1,050 1,200 960 870
Net Interest Income After
Provision for Loan Losses.............................. 25,324 24,426 23,096 20,355 17,286
Other Income............................................. 4,725 4,256 4,217 5,195 4,977
Other Expenses........................................... 20,513 19,994 19,292 18,462 16,806
Income Before Provision for Income Taxes................. 9,536 8,688 8,021 7,088 5,457
Provision for Income Taxes............................... 2,429 1,996 1,827 1,555 1,144
Net Income............................................... $ 7,107 $ 6,692 $ 6,194 $ 5,533 $ 4,313
Per Share Data
Earnings Per Common Share and
Common Equivalent Share................................ $ 2.06 $ 1.95 $ 1.81 $ 1.62 $ 1.27
Cash Dividends Paid Per Share:
Class A Common......................................... .380 .315 .276 .236 .220
Common................................................. .315 .263 .222 .192 .180
Book Value Per Common Share and
Common Equivalent Share................................ 17.26 15.64 13.17 13.25 11.15
Market Price Per Share................................... 23.25 20.63 17.25 14.33 10.40
Year-End Balance Sheet Data
Total Assets............................................. $768,655 $678,102 $634,705 $613,574 $514,913
Loans, Net of Unearned Discount.......................... 420,164 362,728 309,681 278,177 265,538
Allowance for Loan Losses................................ 4,109 3,932 3,859 3,231 2,890
Investment Securities.................................... 265,954 256,192 263,943 223,988 180,108
Demand Deposits.......................................... 147,497 128,236 109,237 113,780 94,222
Total Deposits........................................... 648,303 555,086 513,623 508,173 436,599
Long-term Debt/1/........................................ -- 3,500 6,000 6,000 --
Shareholders' Equity..................................... 59,553 53,762 42,909 44,118 37,764
Financial Ratios
Return on Average Assets................................. .97% 1.03% 1.01% .95% .84%
Return on Average Equity................................. 12.77 14.00 14.54 13.85 12.00
Net Interest Margin...................................... 4.20 4.54 4.61 4.44 4.33
Net Interest Spread...................................... 3.23 3.57 3.87 3.75 3.47
Dividend Payout Ratio.................................... 18.63 14.63 14.13 16.75 15.63
Capital Ratios
Average Equity to Average Total Assets................... 7.59% 7.39% 6.95% 6.89% 6.98%
Tier 1 Capital Ratio..................................... 12.66 13.33 13.37 11.88 12.30
Total Capital Ratio...................................... 13.54 14.32 14.46 12.83 13.24
Capital Leverage Ratio................................... 7.69 7.94 7.50 6.56 7.27
Asset Quality Ratios
Nonperforming Loans to Total Loans....................... .49% .03% .21% .11% .17%
Nonperforming Assets to Total Loans and
Other Real Estate Owned................................ .49 .03 .21 .46 .54
Nonperforming Assets to Total Capital.................... 3.49 .19 1.49 2.92 3.80
Allowance for Loan Losses to Total Loans................. .98 1.08 1.25 1.16 1.09
Net Charge-offs to Average Loans......................... .34 .30 .20 .23 .22
Allowance for Loan Losses to Nonperforming Loans......... 1.98x 37.81x 6.05x 10.99x 6.54x
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/The long-term debt consisted of Federal Home Loan Bank advances at the
subsidiary bank.
6
<PAGE>
Financial Review
First Oak Brook Bancshares, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Results of Operations
Earnings
First Oak Brook Bancshares, Inc. consolidated net income and earnings per share
for 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net income.......... $7,107,000 $6,692,000 $6,194,000
Earnings per share.. $ 2.06 $ 1.95 $ 1.81
</TABLE>
1996 versus 1995
The 1996 results compared to 1995 include the following significant pre-tax
components:
. Net interest income rose $1,358,000 due to a 13% increase in average earning
assets offset by a 7% decrease in the net interest margin.
. Management increased the provision for loan losses by $460,000 considering
loan portfolio growth, higher credit card losses and one nonaccrual loan.
. Other income increased $469,000 due to increased fee income from business
deposit accounts, trust and investment management, mortgages sold in the
secondary market and merchant credit card processing offset by a decrease in
investment securities gains of $113,000.
. Salaries and employee benefits increased $845,000 due to additional staffing,
normal salary increases and higher benefit payments.
. Advertising and business development expenses decreased $189,000 due to a
reduction in advertising offset by increased business development costs.
. FDIC premiums decreased $590,000 as a result of lower
FDIC premiums for "well-capitalized" banks which became effective January 1,
1996.
1995 Versus 1994
The 1995 results compared to 1994 include the following significant pre-tax
components:
. Net interest income rose $1,180,000 due to a 7% increase in average earning
assets offset by a 2% decrease in the net interest margin.
. Based on management's review of the adequacy of the loan loss reserve, the
provision for loan losses was decreased $150,000.
. Included in other income was a decrease in business account analysis fees of
$278,000 offset by an increase in trust and investment management fees of
$148,000 and an increase in investment securities gains of $90,000.
. Salaries and employee benefits increased $752,000 due to upgrading of staff to
enhance customer service and expand business development opportunities, raises,
and increased benefit payments.
. Advertising and business development expenses increased $192,000 primarily for
retail product advertising and increased business development expenses.
. FDIC premiums decreased $501,000 as a result of lower FDIC premiums for "well-
capitalized" banks which became effective June 1, 1995.
. Other operating expenses increased $132,000. Excluding the gain on the sale of
other real estate owned of $328,000 in 1994, the other operating expenses
decreased $196,000, primarily due to reduction in credit card fraud.
- --------------------------------------------------------------------------------
Net Interest Income
Net interest income is the difference between interest earned on loans,
investments and other earning assets and interest paid on deposits and other
interest-bearing liabilities. Net interest income is the principal source of the
Company's revenues.
1996 versus 1995
On a tax-equivalent basis, net interest income for 1996 totaled $28,153,000, an
increase of $1,266,000 or 5% over 1995. This increase is attributable to a 13%
increase in average earning assets offset by a 7% decrease in the net interest
margin to 4.20% in 1996 from 4.54% in 1995. The compression of the net interest
margin was a result of the following:
. During 1996, the prime rate averaged 8.27%, while in 1995 the prime rate
averaged 8.83%. Annual yields on earning assets for 1996 reflect this decrease,
declining 35 basis points in comparison with 1995. Lower rates paid on interest
bearing liabilities were offset by a $69 million increase in the average balance
of time deposits. The net effect of the rate decreases and the change in deposit
mix was a decline of only one basis point in the rate on interest bearing
liabilities.
. Retail consumers continued to show a strong preference for longer-term, higher
yielding CDs over shorter-term, lower yielding savings and money market
accounts. The 1996 average balance for time deposits increased $69 million
compared to 1995 while the 1996 average balance for savings and money market
accounts declined $11 million compared to 1995. Competitive pressure for
consumer dollars from financial institutions and high returns in the equity
markets kept CD rates relatively high.
. Further compression of the net interest margin in 1996 was offset by the 21%
growth in average loans. The $67 million increase in average loans was primarily
in real estate (commercial and residential) and indirect auto loans. Credit card
growth was constrained as a result of vigorous competition.
1995 versus 1994
On a tax-equivalent basis, net interest income for 1995 totaled $26,887,000, an
increase of $1,323,000 or 5% over 1994. This increase is attributable to a 7%
increase in average earning assets offset by a 2% decrease in the net interest
margin to 4.54% in 1995 from 4.61% in 1994. The compression of the net interest
margin was a result of the following:
. During 1994 the prime rate was adjusted upwards from 6.00% to 8.50%, while in
1995 after a 50 basis point increase
7
<PAGE>
Financial Review
First Oak Brook Bancshares, Inc. and Subsidiary
- --------------------------------------------------------------------------------
to 9.00% in the first quarter, the prime rate declined to 8.50% during the
remainder of the year. In a rising interest rate environment, such as we
experienced in 1994, the Company enjoyed temporary margin improvement due to the
difference in timing of the repricing of assets and deposit liabilities.
Conversely, in a declining interest rate environment, as in 1995, the Company
experienced margin compression.
. The cost of interest bearing deposits increased in excess of 100 basis points
from 1994 to 1995. Retail consumers showed continued strong preference for
higher yielding CDs over shorter-term, lower yielding savings and money market
accounts-in essence, locking in higher yields. The 1995 average balance for
savings and money market accounts declined $33 million compared to 1994, while
the 1995 average balance for time deposits increased $53 million compared to
1994. Competitive pressure among Chicago area banks kept CD rates relatively
high in comparison to U.S. Treasury yields.
. During 1995 long term rates fell more rapidly than short term rates resulting
in a "flattening of the yield curve." The Company's subsidiary bank borrows
money in the form of deposits on the short end of the yield curve and invests
some of these funds on the intermediate to long end of the yield curve. With the
flattening of the yield curve, the spread between short and long term rates has
compressed which negatively impacted the Company's net interest margin.
. Further compression of the net interest margin in 1995 was offset by the 14%
growth in average loans. The $41 million increase in average loans was primarily
in real estate (commercial and residential) and indirect auto loans. Credit card
growth was constrained as a result of vigorous competition.
The following table presents the average interest rate on each major category
of interest-earning assets and interest-bearing liabilities for 1996, 1995 and
1994.
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------- ----------------------------- ---------------------------
Average Balances and Effective Interest Interest Interest
Interest Rates Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rates Balance Expense Rates Balance Expense Rates
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Earning assets:
Federal funds sold................... $ 17,679 $ 943 5.33% $ 17,375 $ 1,024 5.89% $ 24,567 $ 963 3.92%
Interest-bearing deposits with banks. 250 13 5.20 128 8 6.25 173 7 4.05
Taxable securities................... 208,546 12,551 6.02 195,080 11,869 6.08 197,025 11,188 5.68
Tax exempt securities/1/............. 51,101 3,956 7.74 54,907 4,355 7.93 49,007 3,890 7.94
Loans, net of unearned discount/1,2/. 392,572 36,328 9.25 325,228 32,427 9.97 284,286 26,308 9.25
------------------------- -------------------------- --------------------------
Total earning assets/interest income.. $670,148 $53,791 8.03% $592,718 $ 49,683 8.38% $555,058 $42,356 7.63%
------- ---- -------- ---- ------- ----
Cash and due from banks............... 41,738 31,868 34,102
Other assets.......................... 25,013 26,389 27,268
Allowance for loan losses............. (4,139) (4,045) (3,638)
-------- -------- --------
$732,760 $646,930 $612,790
======== ======== ========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Savings and NOW accounts............. $186,195 $ 6,852 3.68% $199,523 $ 7,785 3.90% $226,513 $ 7,744 3.42%
Money market accounts................ 29,865 900 3.01 27,205 835 3.07 32,984 802 2.43
Time deposits........................ 256,520 14,786 5.76 187,281 10,989 5.87 133,999 6,156 4.59
Short-term debt...................... 60,753 3,058 5.03 56,245 2,993 5.32 46,612 1,814 3.89
Long-term debt....................... 870 42 4.83 4,103 194 4.73 6,000 276 4.60
------------------------- -------------------------- --------------------------
Total interest-bearing liabilities/
interest expense..................... $534,203 $25,638 4.80% $474,357 $ 22,796 4.81% $446,108 $16,792 3.76%
------- ---- -------- ---- ------- ----
Demand deposits....................... 136,866 119,812 119,978
Other liabilities..................... 6,052 4,967 4,098
-------- -------- --------
Total liabilities..................... $677,121 $599,136 $570,184
Shareholders' equity.................. 55,639 47,794 42,606
-------- -------- --------
$732,760 $646,930 $612,790
======== ======== ========
Net interest income/net interest
margin/3/............................ $28,153 4.20% $ 26,887 4.54% $ 25,564 4.61%
Net interest spread/4/................ 3.23% 3.57% 3.87%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ Tax equivalent basis. Interest income and average yield on tax exempt loans
and investment securities include the effects of tax equivalent adjustments
using a tax rate of 34%.
/2/ Includes nonaccrual loans.
/3/ Total interest income, tax equivalent basis, less total interest expense,
divided by average earning assets.
/4/ Total yield on average earning assets, less total rate paid on average
interest-bearing liabilities.
8
<PAGE>
Financial Review
First Oak Brook Bancshares, Inc. and Subsidiary
- --------------------------------------------------------------------------------
The following table presents a summary analysis of changes in interest income
and interest expense for 1996 as compared to 1995 and 1995 as compared to 1994.
Interest income rose in 1996 due to the higher volume of loans offset by lower
yields on earning assets. Interest expense rose in 1996 due to the volume of
higher cost time deposits offset by lower rates paid on interest bearing
liabilities. The increase in net interest income in 1995 was due to the
increased volume of loans and higher yields on earning assets, offset by higher
rates paid on liabilities.
<TABLE>
<CAPTION>
Analysis of Net Interest Income Changes
1996 Over 1995 1995 Over 1994
-------------------------------- -----------------------------------
(Dollars in thousands) Change due to: Volume/1/ Rate/1/ Total Volume/1/ Rate/1/ Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income:
Federal funds sold.......................... $ 18 $ (99) $ (81) $ (334) $ 395 $ 61
Interest-bearing deposits with banks........ 6 (1) 5 (2) 3 1
Taxable securities.......................... 811 (129) 682 (111) 792 681
Tax exempt securities/2/.................... (297) (102) (399) 468 (3) 465
Loans, net of unearned discount/2,3/........ 6,373 (2,472) 3,901 3,980 2,139 6,119
------------------------------- -----------------------------------
Total interest income....................... $6,911 $(2,803) $ 4,108 $4,001 $3,326 $7,327
------------------------------- ------------------------------------
Increase (decrease) in interest expense:
Savings & NOW accounts...................... $ (504) $ (429) $ (933) $ (983) $1,024 $ 41
Money market accounts....................... 80 (15) 65 (156) 189 33
Time deposits............................... 3,994 (197) 3,797 2,848 1,985 4,833
Short-term debt............................. 232 (167) 65 425 754 1,179
Long-term debt.............................. (156) 4 (152) (89) 7 (82)
------------------------------- -----------------------------------
Total interest expense...................... $3,646 $ (804) $ 2,842 $2,045 $3,959 $6,004
------------------------------- -----------------------------------
Increase (decrease) in net interest income.. $3,265 $(1,999) $1,266 $1,956 $ (633) $1,323
=============================== ====================================
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/The change in interest due to both rate and volume has been allocated
proportionately.
/2/Tax equivalent basis. Tax exempt loans and investment securities include the
effects of tax equivalent adjustments using a tax rate of 34%.
/3/Includes nonaccrual loans.
- --------------------------------------------------------------------------------
Allowance and Provision for Loan Losses
Loans which are determined to be uncollectible are charged against the allowance
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's
policy with respect to credit card and consumer installment loans is to charge-
off all such loans when they are deemed to be uncollectible or when 180 days
past due, whichever comes first. With respect to commercial, real estate and
other loans, charge-offs are made on the basis of management's ongoing
evaluation of collectibility. In addition, any loans which are classified as
"loss" in regulatory examinations are charged off.
9
<PAGE>
Financial Review
First Oak Brook Bancshares, Inc. and Subsidiary
- --------------------------------------------------------------------------------
The following table summarizes the loan loss experience for each of the last
five years.
<TABLE>
<CAPTION>
Summary of Loan Loss Experience
(Dollars in thousands) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans for the period, net of unearned discount
and allowance for loan losses............................. $388,433 $321,183 $280,648 $266,352 $226,265
----------------------------------------------------
Allowance for loan losses, beginning of period............. $ 3,932 $ 3,859 $ 3,231 $ 2,890 $ 2,514
Charge-offs for period:
Real estate mortgage and home equity loans................ - - - - (54)
Commercial loans.......................................... - - (25) (125) (105)
Credit card and consumer installment loans................ (1,511) (1,112) (710) (619) (524)
----------------------------------------------------
Total charge-offs....................................... (1,511) (1,112) (735) (744) (683)
Recoveries for period: ----------------------------------------------------
Real estate mortgage and home equity loans................ - - 35 6 6
Commercial loans.......................................... 33 41 52 16 115
Credit card and consumer installment loans................ 145 94 76 103 68
----------------------------------------------------
Total recoveries........................................ 178 135 163 125 189
----------------------------------------------------
Net charge-offs for the period............................. (1,333) (977) (572) (619) (494)
Provision for loan losses.................................. 1,510 1,050 1,200 960 870
----------------------------------------------------
Allowance for loan losses, end of period................... $ 4,109 $ 3,932 $ 3,859 $ 3,231 $ 2,890
====================================================
Ratio of net charge-offs to average loans outstanding...... .34% .30% .20% .23% .22%
Allowance for loan losses as a percent of loans
outstanding, net of unearned discount at end of period.... .98% 1.08% 1.25% 1.16% 1.09%
Ratio of allowance for loan losses to nonperforming loans.. 1.98 37.81x 6.05x 10.99x 6.54x
----------------------------------------------------
</TABLE>
Management increased the provision for loan losses by $460,000 in 1996 over 1995
considering loan portfolio growth of $57 million, higher credit card charge-offs
and one nonaccrual loan.
<TABLE>
<CAPTION>
Analysis of Net Credit Card Charge-offs
(Dollars in thousands) 1996 1995 1994
- -------------------------------------------------------------------
<S> <C> <C> <C>
Net charge-offs $1,358 $1,015 $ 639
Percent of average credit
card outstandings 2.38% 1.78% 1.13%
Industry average/1/ 4.77% 3.89% 3.36%
</TABLE>
Current economic trends of higher consumer debt and a rise in consumer
bankruptcies contributed to the increase in losses for both the Company and the
industry. As noted in the table above, the Company's charge-off ratio is well
below that of the industry. The Company also has a small portfolio ($2 million
in outstandings) of college student credit cards which experienced net losses of
$255,000 in 1996 as compared to $26,000 in 1995. The Company has discontinued
offering this product at college campuses.
Over the past five years, the Company has experienced high asset quality.
Fluctuations in asset quality ratios are due to one nonaccrual loan in 1996 and
one parcel of other real estate owned in 1993 and 1992. See nonperforming assets
discussion for further information.
The Company's allowance for loan losses as a percent of loans outstanding
was .98% at December 31, 1996 as compared to 1.08% in 1995 and 1.25% in 1994.
Management believes the allowance for loan losses is at a prudent level.
The provision for loan losses is sufficient to provide for current loan
losses and maintain the allowance at an adequate level commensurate with
management's evaluation of the risks inherent in the loan portfolio. In order to
identify potential risks in the loan portfolio of the Company's bank subsidiary
and determine the necessary provision for loan losses, detailed information is
obtained from the following sources:
. Regular reports prepared by the bank's management which contain information on
the overall characteristics of the loan portfolio, including delinquencies and
nonaccruals, and specific analysis of loans requiring special attention (i.e.
"watch lists");
. Examinations of the loan portfolio of the subsidiary bank by Federal and State
regulatory agencies; and
. Reviews by the Company's independent auditors and internal credit and audit
staffs.
Management of the subsidiary bank prepares a detailed analysis, at least
quarterly, reviewing the adequacy of its allowance and, when appropriate,
recommending an increase or decrease in its provision for loan losses. This
analysis is divided into two parts-one for allocated and the other for
unallocated reserves. The allocated segment involves primarily an estimated
- ------------------------------------------------------------------------------
/1/Source: MasterCard International, Inc. Member Statistics Bulletin Statistical
Information on all credit card products. (The 1996 percent is the annualized
third quarter net credit losses as a percent of average outstandings.)
10
<PAGE>
Financial Review
First Oak Brook Bancshares, Inc. and Subsidiary
- --------------------------------------------------------------------------------
calculation of losses on specific problem and management watch list loans and on
delinquent consumer credit card and installment loans. The unallocated segment
involves primarily a calculation of the bank's actual net charge-off history
averaged with industry net charge-off history by major loan categories. In
addition, the bank considers its loan growth, management capabilities, economic
trends, credit concentrations, industry risks, underlying collateral values and
the opinions of bank management. Accordingly, because each of these criteria is
subject to change, the allocation of the allowance below is made for analytical
purposes and is not necessarily indicative of the trend of future loan losses in
any particular loan category. The total allowance is available to absorb losses
from any segment of the portfolio.
The following table presents the allocation of the allowance for loan losses
for each of the last five years.
<TABLE>
<CAPTION>
Allocation of Allowance for Loan Losses December 31,
--------------------------------------------------
(Dollars in thousands) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Analysis of allowance for loan losses:
Real estate--land acquisition and construction loans.. $ 400 $ 126 $ 144 $ -- $ --
Real estate mortgage and home equity loans............ 12 7 11 31 37
Commercial loans...................................... -- -- 30 118 119
Credit card loans..................................... 324 208 88 169 164
Consumer installment loans............................ 28 72 26 24 41
Unallocated........................................... 3,345 3,519 3,560 2,889 2,529
--------------------------------------------------
Total allowance..................................... $4,109 $3,932 $3,859 $3,231 $2,890
==================================================
Percentage of loans to gross loans:
Real estate--land acquisition and construction loans.. 8.5% 7.9% 4.8% 4.3% 4.3%
Real estate mortgage and home equity loans............ 50.5 50.6 53.3 57.3 64.8
Commercial loans...................................... 9.7 10.5 10.7 10.4 10.5
Credit card loans..................................... 13.8 16.1 19.3 20.1 16.5
Consumer installment loans............................ 17.5 14.9 11.9 7.9 3.9
--------------------------------------------------
100.0% 100.0% 100.0% 100.0% 100.0%
==================================================
</TABLE>
- --------------------------------------------------------------------------------
Nonperforming Assets
The Company discontinues the accrual of interest on loans, excluding credit card
loans, when the continuity of the contractual principal or interest is deemed
doubtful by management or when 90 days past due or more and the loan is not well
secured or in the process of collection. Interest income is recorded on these
loans only as it is collected. Interest payments on nonaccrual loans which
contain unusual risk features or marginal collateral values may be applied
directly to loan principal for accounting purposes. Renegotiated loans are loans
on which interest is being accrued at less than the original contractual or
existing market rate of interest because of the inability of the borrower to
service the obligation under the original terms of the agreement. There are no
renegotiated loans.
The following table highlights the Company's nonperforming assets.
<TABLE>
<CAPTION>
Nonperforming Assets December 31,
--------------------------------------------------
(Dollars in thousands) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccruing...................................... $1,730 $ -- $ 70 $ 36 $ 280
Loans which are past due 90 days or more......... 349 104 568 258 162
--------------------------------------------------
Total nonperforming loans...................... 2,079 104 638 294 442
Other real estate owned.......................... -- -- -- 994 994
--------------------------------------------------
Total nonperforming assets..................... $2,079 $104 $ 638 $1,288 $1,436
--------------------------------------------------
Nonperforming loans to total loans outstanding... .49% .03% .21% .11% .17%
Nonperforming assets to total loans outstanding
and other real estate owned.................... .49% .03% .21% .46% .54%
Nonperforming assets to total assets............. .27% .02% .10% .21% .28%
Nonperforming assets to total capital............ 3.49% .19% 1.49% 2.92% 3.80%
--------------------------------------------------
</TABLE>
The Company's ratio of nonperforming assets to total loans outstanding and other
real estate owned of .49% was below the industry peer group ratio of .87%/1/.
- -----------------------------------------------------
/1/Source: Seventh Federal Reserve District Bank Holding Company Performance
Report as of September, 1996, page 1, Peer Group 04, Consolidated assets
between $500 million and $1 billion, consisting of 263 banks.
11
<PAGE>
Financial Review
First Oak Brook Bancshares, Inc. and Subsidiary
- --------------------------------------------------------------------------------
At December 31, 1996, the $1.7 million in nonaccrual loans consisted of one
commercial real estate development loan collateralized by nine condominium units
and a combination of improved and unimproved land zoned for 136 multi-family
housing units. As part of a two-phase liquidation plan, the condominium
inventory was auctioned in October, 1996. Subsequent to December 31, 1996, net
sales proceeds of $363,000 from the closing of six condominium units were
received and applied directly to loan principal. Estimated net sales proceeds of
$153,000 from the closing of the remaining three units are expected to be
received in the first quarter of 1997, and will reduce loan principal to
approximately $1.2 million. Management is pursuing foreclosure of the remaining
property and a personal judgment against the guarantor and has specifically
reserved $400,000 of the allowance for loan losses for this loan.
The Company also holds, in other assets, surplus property which was
formerly used as its subsidiary bank's drive-up facility. The property was
leased in May, 1992 for $64,000 net per year for five years to McDonald's
Corporation. In February, 1997, the subsidiary bank exercised its option
requiring the lessee to purchase the property. This transaction resulted in a
pre-tax book gain of $517,000.
- --------------------------------------------------------------------------------
Summary of Other Income
The following table summarizes significant components of other income and
percentage changes from year to year:
<TABLE>
<CAPTION>
% Change
--------------------
(Dollars in thousands) 1996 1995 1994 '96--'95 '95--'94
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Service charges....................... $2,459 $2,333 $2,611 5 % (11)%
Trust and investment management fees.. 653 592 444 10 % 33
Other operating income................ 1,599 1,204 1,125 33 % 7
Investment securities gains........... 14 127 37 (89)% 243
---------------------------------------------
Total................................ $4,725 $4,256 $4,217 11 % 1%
=============================================
</TABLE>
1996 Versus 1995
Service charges on deposit accounts increased $126,000, or 5%, primarily due to
an increase in business account analysis fees.
Trust department income increased $61,000, or 10%, primarily due to an
increase in assets under investment management and other new trust business.
Discretionary assets under investment management by the Trust department grew
over $23 million, from $68 million at December 31, 1995 to $91 million at
December 31, 1996. Earnings from this growth will be fully reflected in 1997 as
these accounts were primarily being billed annually in arrears in 1996.
The increase in other operating income of $395,000, or 33%, was principally
attributable to increased merchant credit card processing fees and fees on
mortgages originated and sold in the secondary market.
Investment securities gains decreased $113,000 from the $127,000 of
securities gains recognized in 1995 when the Company restructured its held-to-
maturity and available-for-sale portfolios. The portfolios were restructured in
1995 to more closely mirror each other in both security composition and maturity
distribution. The 1995 securities gains were from the sale of longer maturity
securities in the available-for-sale portfolio.
1995 Versus 1994
Service charges on deposit accounts decreased $278,000 primarily due to a
decrease in business account analysis fees. With the increase in the earnings
credit, commercial customers chose to maintain account balances to offset
service charges. This was partially offset by service charges on personal
accounts which increased $63,000.
Trust department income increased $148,000, or 33%, primarily due to an
increase in assets under investment management and other new trust business. The
discretionary assets under investment management by the Trust department grew
nearly $20 million from $48 million at December 31, 1994 to $68 million at
December 31, 1995.
The increase in other operating income of $79,000, or 7%, was principally
attributable to increased fee income from the sale, through a third party, of
mutual funds and annuities offset by a decrease in gains on mortgages sold. The
Investment Center, a new business initiative selling mutual funds and annuities
through a third party, was launched late 1994 and contributed additional fee
income in 1995. The decrease in fee income from gains on mortgages sold was due
to retaining a greater portion of mortgage originations for the Company's loan
portfolio during 1995 compared to 1994.
Investment securities gains increased $90,000 due to the Company's
restructuring of the held-to-maturity and available-for-sale portfolios.
12
<PAGE>
Financial Review
First Oak Brook Bancshares, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Summary of Other Expenses
The following table summarizes significant components of other expenses and
percentage changes from year to year:
<TABLE>
<CAPTION>
% Change
-------------------
(Dollars in thousands) 1996 1995 1994 '96--'95 '95--'94
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits........ $11,766 $10,921 $10,169 8% 7%
Occupancy expense..................... 1,430 1,315 1,306 9 1
Equipment expense..................... 1,737 1,702 1,664 2 2
Data processing fees.................. 1,625 1,473 1,314 10 12
Professional fees..................... 329 259 290 27 (11)
Postage, stationery and supplies...... 752 815 863 (8) (6)
Advertising and business development.. 1,205 1,394 1,202 (14) 16
FDIC premiums......................... 2 592 1,093 (99) (46)
Other operating expenses.............. 1,667 1,523 1,391 9 9
-------------------------------------------------
Total................................ $20,513 $19,994 $19,292 3% 4%
=================================================
</TABLE>
1996 Versus 1995
Other expenses rose $519,000 in 1996 over 1995. Salaries and employee benefits
rose $845,000 or 8%. The increase is due to additional staffing, normal salary
increases and higher benefit payments.
Occupancy expense increased $115,000, or 9%, over 1995 due to increased
real estate taxes and lower rental income. In August, 1996, the Company took
over approximately 2,000 square feet of space in its Oak Brook headquarters
formerly rented by a third party.
Data processing increased $152,000, primarily due to increased deposit
volume, higher credit card processing fees, trust processing fees and
miscellaneous processing fees for compliance and student loans.
Advertising and business development expenses decreased $189,000 due to a
reduction in advertising offset by increased business development costs.
FDIC premiums decreased $590,000 due to lower quarterly assessments. The
FDIC premium was decreased to $500 per quarter for "well-capitalized" banks in
1996. Based on current legislation and current deposit levels, premiums are
estimated to be approximately $80,000 for 1997.
1995 Versus 1994
Other expenses rose $702,000 in 1995 over 1994. Salaries and employee benefits
rose $752,000 or 7%. The increase is due to upgrading of staff, normal salary
increases and higher benefit payments. The Company invested in these positions
to enhance customer service and expand business development opportunities.
Data processing increased $159,000, primarily due to higher credit card
processing fees and messenger service. The increase in credit card processing is
due to system enhancements and price increases. Messenger service, an internal
function in 1994, was outsourced in the first quarter of 1995. While messenger
service increased data processing fees in 1995, there are offsetting cost
savings included in salaries and employee benefits for 1995.
Advertising and business development expenses increased $192,000, primarily
due to the advertising of retail products and increased business development
expenses.
FDIC premiums decreased $501,000 due to lower assessments. The FDIC premium
was lowered, effective June 1, 1995, for banks categorized as "well-capitalized"
from $.23 per $100 deposit to $.04 per $100 deposit.
Other operating expenses increased $132,000. Excluding the gain on the sale
of other real estate owned of $328,000 in 1994, the other operating expenses
decreased $196,000 in 1995. This decrease in 1995 was primarily due to a
reduction in credit card fraud.
- --------------------------------------------------------------------------------
Income Tax Expense
Income taxes for 1996 totaled $2,429,000 as compared to $1,996,000 for 1995 and
$1,827,000 in 1994. When measured as a percentage of income before income taxes,
the Company's effective tax rate was 25% for 1996 compared to 23% in 1995 and
1994. The increase in the provision for income taxes in 1996 and 1995 is due to
higher pre-tax earnings. The increase in the effective tax rate in 1996 and 1995
was due to a decrease in tax exempt income as a percentage of pre-tax income.
13
<PAGE>
Financial Review
First Oak Brook Bancshares, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Financial Condition
Liquidity and Interest Rate Sensitivity
Effective management of balance sheet liquidity is necessary to fund growth in
earning assets and to pay liability maturities, depositors' withdrawal
requirements and shareholders' dividends.
The Company has numerous sources of liquidity including a significant
portfolio of shorter term assets, readily marketable investment securities, a
growing deposit base, and access to borrowing arrangements.
Available borrowing arrangements are summarized as follows:
Subsidiary Bank:
. Informal Federal funds lines aggregating $98 million with seven correspondent
banks.
. Reverse repurchase agreement lines totaling $150 million with two brokerage
firms and three correspondent banks.
. Advances up to $18.5 million from the Federal Home Loan Bank of Chicago. Oak
Brook Bank currently has no outstanding advances with the Federal Home Loan
Bank.
Parent Company:
. Revolving credit arrangement for $5 million. The line is currently unused and
matures on May 1, 1997. It is anticipated to be renewed annually.
. The parent company also had cash, short-term investments and other readily
marketable securities totaling $8.6 million at December 31, 1996. As of February
15, 1997, these balances totaled $3.5 million. The decrease in cash equivalents
was due to a $2 million contribution of capital to its bank subsidiary, a $2.5
million purchase of treasury stock and payment of accrued expenses.
Interest rate risk arises when the maturity or repricing of assets differs
significantly from the maturity or repricing of liabilities.
The following table details the Company's interest rate sensitive position
at December 31, 1996.
<TABLE>
<CAPTION>
Interest Rate Sensitive Position
1-90 91-180 181-365 Over 1
(Dollars in thousands) days days days year Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S>
Rate sensitive assets: <C> <C> <C> <C> <C>
Federal funds sold....................................................... $ 22,150 $ -- $ -- $ -- $ 22,150
Interest-bearing deposits with banks..................................... 289 -- -- -- 289
Taxable securities....................................................... 22,167 12,532 18,796 159,975 213,470
Tax-exempt securities.................................................... 2,586 -- 3,931 45,967 52,484
Loans, net of unearned discount.......................................... 198,635 23,981 49,932 147,616 420,164
-------------------------------------------------------
Total................................................................... $245,827 $ 36,513 $ 72,659 $353,558 $708,557
-------------------------------------------------------
Cumulative total........................................................ $245,827 $282,340 $354,999 $708,557
-------------------------------------------------------
Rate sensitive liabilities:
Savings and NOW accounts/1/.............................................. $108,719 $ 1,872 $ 4,680 $ 64,812 $180,083
Money market accounts.................................................... 32,027 -- -- -- 32,027
Time deposits............................................................ 111,128 58,862 58,002 60,704 288,696
Short-term debt.......................................................... 49,353 31 5,803 -- 55,187
-------------------------------------------------------
Total................................................................... $301,227 $ 60,765 $ 68,485 $125,516 $555,993
-------------------------------------------------------
Cumulative total........................................................ $301,227 $361,992 $430,477 $555,993
-------------------------------------------------------
Cumulative gap............................................................ $(55,400) $(79,652) $(75,478) $152,564
-------------------------------------------------------
Cumulative gap to total assets ratio...................................... (7.21)% (10.36)% (9.82)%
-------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ The decay assumptions on savings and NOW accounts are based on historical
analysis and experience.
The previous table presents a static gap analysis which does not fully capture
the true dynamics of interest rate changes including the timing and/or degree of
interest rate changes. While most of the asset categories' rates change when
certain independent indices (such as the prime rate) change, the liability
categories are repriced at the Company's discretion. The Company utilizes a
simulation model to analyze its interest rate risk. The analysis incorporates
changes in net interest income and duration of shareholders' equity under
various interest rate scenarios including a 200 basis point immediate change in
rates. Management recognizes differences between rate changes beyond its control
and rate changes within its control and incorporates other factors such as
balance sheet growth to better measure interest rate risk.
The Company conducts its analysis on a regular basis and has established
guidelines to control and limit risk. In management's opinion, the Company's
interest rate risk position is within an acceptable range in light of current
economic conditions.
14
<PAGE>
Financial Review
First Oak Brook Bancshares, Inc. and Subsidiary
- -------------------------------------------------------------------------------
Investment Securities
1996
In 1996, the Company's investment portfolio increased slightly to $266 million.
This increase of approximately 4% substantially lagged overall asset growth as
the Company focused on growing its higher yielding loan portfolio. The Company
continued its strategy to shelter current and future income from state taxation
by primarily investing in U.S. Treasury and state income tax exempt U.S.
Government Agency securities and to improve the portfolio's overall yield by
increasing investment in U.S. Government Agency Notes and Bonds.
U.S. Treasury Securities: The Company reduced by $14 million its holdings of
U.S. Treasuries. This reduction was accomplished through the substitution of
liquid, intermediate maturity U.S. Government Agency Notes and Bonds, for
maturing Treasury holdings, to capture attractive relative returns without an
overall increase in portfolio credit risk. As a result of this substitution
process, the average maturity of the U.S. Treasury portfolio was reduced to 1.9
years in 1996 from 2.3 years in 1995.
U.S. Government Agency Notes, Bonds, and Mortgage Backed Securities: The U.S.
Government Agency securities (including U.S. Government Agency Mortgage Backed
securities) portfolio rose $24 million in 1996. This growth resulted from a
combination of $10 million in new funds added to the portfolio and the
substitution of $14 million of higher yielding U.S. Government Agency Notes and
Bonds for maturing U.S. Treasury securities. For the second consecutive year,
U.S. Government Agency Mortgage Backed Security holdings declined due to
expected prepayments with the proceeds being reinvested in intermediate maturity
U.S. Government Agency Notes and Bonds. Yield premiums over comparable maturity
U.S. Treasury securities continued to shrink in 1996 on U.S. Government Agency
Mortgage Backed Securities making new investments in these securities less
attractive. To minimize the Company's state tax liability, the majority of U.S.
Government Agency securities purchased were exempt from state income taxes.
Overall, the average maturity of this sector of the portfolio was reduced in
1996 to 2.8 years from 3.1 years in 1995.
Municipal Securities: The Company's Municipal security holdings remained
relatively constant in 1996 at $52 million. Due to their high yields, low credit
risk, and pledgability for public deposits, Municipal securities remain
attractive as investments. All Municipal securities held are rated "A" or better
by one or more of the national rating services or are "non-rated" issues of
local communities which, through the bank's own analysis, are deemed to be of
satisfactory quality.
Corporate and Other Securities: These securities consist primarily of preferred
stocks held by the parent company and Federal Home Loan Bank stock. Because of
the 100% risk based capital weighting for corporate debt securities, the Company
does not emphasize this security classification.
1995
In 1995, the Company reduced its investment portfolio to $256 million, a decline
of $8 million or 3%. The reductions were made primarily in the U.S. Treasury and
Municipal sectors of the portfolio. Also in 1995, in accordance with the
provisions of the "Special Report-A Guide to Implementation of Statement 115 on
Accounting for Certain Investment in Debt and Equity Securities" issued by the
Financial Accounting Standards Board staff, the Company restructured the held-
to-maturity and available-for-sale portfolios to more closely mirror each other
in both security composition and maturity distribution. As a result of this
restructuring, $33 million of securities were transferred from held-to-maturity
to available-for-sale and $28 million of securities were transferred from
available-for-sale to held-to-maturity.
The following table sets forth the book values of investment securities
held on the dates indicated.
<TABLE>
<CAPTION>
Investments by Type (at book value)
December 31,
----------------------------
(Dollars in thousands) 1996 1995 1994
- -----------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury........................ $ 91,141 $105,167 $129,034
U.S. Government agencies............. 65,278 33,825 5,562
Mortgage-backed agency securities.... 54,247 61,683 68,184
State and municipal.................. 52,484 51,593 55,226
Corporates and other................. 2,804 3,924 5,937
----------------------------
Total investment portfolio......... $265,954 $256,192 $263,943
============================
</TABLE>
At December 31, 1996 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.
15
<PAGE>
Financial Review
First Oak Brook Bancshares, Inc. and Subsidiary
- --------------------------------------------------------------------------------
The maturity distribution and weighted average yield of investment securities at
December 31, 1996 are presented in the following table:
<TABLE>
<CAPTION>
State
U.S. Treasury U.S. Government & Municipal Corporate and
Analysis of Investment Portfolio Securities Agencies/1/ Securities Other Securities
------------------- ------------------- ------------------- -------------------
(Dollars in thousands) Amount Yield Amount Yield Amount Yield/2/ Amount Yield
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Maturities:
Within 1 year............... $20,067 6.26% $ 20,763 5.54% $ 6,562 8.93% $ 45 3.25%
1--5 years.................. 71,074 6.07 85,379 6.73 18,660 8.20 25 7.50
5--10 years................. -- -- 10,882 6.30 22,715 8.23 -- --
After 10 years.............. -- -- 2,501 6.73 4,547 8.84 2,734/3/ 7.78
----------------------------------------------------------------------------------------
$91,141 6.11% $119,525 6.49% $52,484 8.36% $2,804 7.70%
========================================================================================
Average months to maturity.. 23 34 70 12
</TABLE>
- --------------------------------------------------------------------------------
/1/Included in U.S. Government Agencies are U.S. Government Agency notes and
bonds as well as U.S. Government Agency mortgage-backed securities (USMBS).
Given the amortizing nature of USMBS, the maturities presented in the table are
based on their estimated average lives at December 31, 1996. The estimated
average lives may differ from actual principal cash flows. Principal cash flows
include prepayments and scheduled principal amortization.
/2/Yields on state and municipal securities are calculated on a tax-equivalent
basis using a tax rate of 34%.
/3/Included in this amount are preferred stocks and Federal Home Loan Bank of
Chicago stock, which have no maturity date and are not included in the average
months to maturity. Yields on the stocks are calculated on a tax-equivalent
basis using a tax rate of 34% and the 70% dividend received deduction.
- --------------------------------------------------------------------------------
Loans
1996
At year-end 1996, loans outstanding, net of unearned discount, increased $57.4
million, or 16%, compared to 1995. Consumer loans, residential real estate and
commercial real estate loans led the 1996 loan growth. Commercial and credit
card loan growth was constrained as a result of vigorous competition.
Consumer installment loans increased $19.2 million, or 35%, primarily due to
increases in indirect automobile loans. Indirect automobile loans increased
$19.4 million, or 51%, to $57.8 million in 1996. The Company does not buy
subprime auto paper.
Residential real estate loans increased $12.5 million, or 15%, due to
increased mortgage originations and retaining the majority of these originations
for the Company's loan portfolio.
Real estate construction loans increased $7.1 million, or 25%, due to lending
to Chicago area homebuilders. Commercial mortgage loans increased $8 million, or
14%, primarily due to interim financing provided for several multi-family
properties.
There are no concentrations of loans exceeding 10% of total loans at December
31, 1996, which are not otherwise disclosed below. The Company has no foreign
loans; therefore, no loans to Less Developed Countries (LDCs). The Company has
no agricultural loans.
1995
At year-end 1995, loans outstanding, net of unearned discount, increased $53
million, or 17%, compared to 1994. The majority of the 1995 growth was in
indirect auto loans, real estate (residential and commercial) and commercial
loans. The growth in credit card loans was constrained as a result of vigorous
competition.
The following table sets forth the loans by type at the dates indicated:
<TABLE>
<CAPTION>
December 31,
Loans by Type ---------------------------------------------------
(Dollars in thousands) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial loans.......................... $ 40,895 $ 38,171 $ 33,351 $ 29,035 $ 27,838
Real estate loans
Land acquisition and construction loans.. 35,902 28,770 14,789 12,098 11,404
Commercial mortgage loans................ 63,394 55,437 56,149 44,977 37,377
Residential mortgage loans............... 93,730 81,226 62,557 66,972 84,176
Home equity loans........................ 55,297 47,357 47,192 47,463 50,690
Credit card loans......................... 58,114 58,592 59,984 56,003 43,793
Consumer installment loans................ 73,571 54,420 37,067 21,950 10,616
----------------------------------------------------
420,903 363,973 311,089 278,498 265,894
Less:
Unearned discount........................ 739 1,245 1,408 321 356
Allowance for loan losses................ 4,109 3,932 3,859 3,231 2,890
----------------------------------------------------
Loans, net................................ $416,055 $358,796 $305,822 $274,946 $262,648
====================================================
</TABLE>
16
<PAGE>
Financial Review
First Oak Brook Bancshares, Inc. and Subsidiary
- --------------------------------------------------------------------------------
As evidenced by the previous table, loans secured by real estate comprise the
greatest percentage of total loans. Most of the Company's residential real
estate loans are secured by first or second mortgages on one-to-four family
residences in the Chicago Metropolitan area. The Company generally limits total
advances to a loan to value ratio of eighty percent or less. Commercial
mortgages are generally secured by properties in the Chicago Metropolitan area.
The following table indicates the maturity distribution of selected loans at
December 31, 1996:
<TABLE>
<CAPTION>
Maturity Distribution of Selected Loans One One to Over
year or five five
(Dollars in thousands) less/1/ years years Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial loans..................................... $21,320 $ 13,929 $ 5,646 $ 40,895
Real estate--land acquisition and construction loans. 32,778 3,124 -- 35,902
Commercial and residential mortgage loans............ 12,460 64,774 79,890 157,124
Home equity loans.................................... 7,086 48,211 -- 55,297
------------------------------------
$73,644 $130,038 $85,536 $289,218
====================================
</TABLE>
- --------------------------------------------------------------------------------
/1/Includes demand loans.
The following table indicates, for the loans in the Maturity Distribution table,
the amounts due after one year which have fixed and variable interest rates at
December 31, 1996:
<TABLE>
<CAPTION>
Fixed Variable
(Dollars in thousands) Rate Rate Total
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial loans..................................... $ 13,340 $ 6,235 $ 19,575
Real estate--land acquisition and construction loans. -- 3,124 3,124
Commercial and residential mortgage loans............ 101,677 42,987 144,664
Home equity loans................................... 2,256 45,955 48,211
----------------------------
$117,273 $98,301 $215,574
============================
</TABLE>
Variable rate loans are those on which the interest rate can be adjusted for
changes in the Company's index rate (similar to prime rate), the Wall Street
Journal's published prime rate, U.S. Treasury securities or the brokers' call
money rate. Fixed rate loans are those on which the interest rate cannot be
changed during the term of the loan.
- --------------------------------------------------------------------------------
Deposits
Average deposits for 1996 increased $75.6 million, or 14%, as compared to 1995,
primarily due to a $17 million increase in noninterest-bearing demand deposits,
primarily business accounts, and a $69.2 million increase in time deposits,
primarily from public fund customers and retail promotions. At December 31,
1996, there are no brokered deposits.
Average deposits for 1995 increased $20.3 million, or 4%. The increase in
average deposits is primarily related to a $53.3 million increase in time
deposits offset by a $27 million decrease in savings deposits and NOW accounts
and a $5.8 million decrease in money market accounts.
<TABLE>
<CAPTION>
Average Deposits and Rate by Type 1996 1995 1994
-------------- -------------- --------------
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits.. $136,866 --% $119,812 --% $119,978 --%
Savings deposits and NOW accounts.... 186,195 3.68 199,523 3.90 226,513 3.42
Money market accounts................ 29,865 3.01 27,205 3.07 32,984 2.43
Time deposits........................ 256,520 5.76 187,281 5.87 133,999 4.59
------------------------------------------------
Total................................ $609,446 3.70% $533,821 3.67% $513,474 2.86%
================================================
</TABLE>
17
<PAGE>
Financial Review
First Oak Brook Bancshares, Inc. and Subsidiary
- --------------------------------------------------------------------------------
As of December 31, 1996, the scheduled maturities of time deposits are as
follows:
Maturity Distribution of Time Deposits
<TABLE>
<CAPTION>
(Dollars in thousands)
- ----------------------------------
<S> <C>
1997.................... $228,186
1998.................... 28,401
1999.................... 9,784
2000.................... 15,655
2001 and thereafter..... 6,670
--------
Total................... $288,696
========
</TABLE>
- --------------------------------------------------------------------------------
Short-Term Borrowings
Federal funds purchased, securities sold under agreements to repurchase
("repos") and Treasury, tax and loan (TT&L) demand notes constitute all of the
Company's short-term borrowings. These short-term borrowings are not subject to
FDIC deposit insurance premiums or reserve requirements. The Company attracts
repos primarily from businesses and local governmental units.
Average short-term borrowings increased $4.5 million, or 8%, in 1996 as
compared to 1995 and $9.6 million, or 21%, in 1995 as compared to 1994. The 1996
increase in average short-term borrowings was due to an increase in TT&L
balances. The 1995 increase in average short-term borrowings was due to an
increase in repurchase agreements with governmental units. See "Borrowings" note
to the financial statements for additional information.
- --------------------------------------------------------------------------------
Capital Resources
One of the Company's primary objectives is to maintain strong capital to warrant
the confidence of our customers, shareholders and bank regulatory agencies. A
strong capital base is needed to take advantage of profitable growth
opportunities that arise and to provide assurance to depositors and creditors.
Banking is inherently a risk-taking activity requiring a sufficient level of
capital to effectively and efficiently manage this business risk. The Company's
capital objectives are to:
. maintain sufficient capital to support the risk characteristics
of the Company and the Company's subsidiary bank; and
. maintain capital ratios which meet and exceed the "well-capitalized"
regulatory capital ratio guidelines for the Company and the Company's subsidiary
bank, thereby minimizing regulatory intervention and lowering FDIC assessments.
At December 31, 1996, the Company achieved record shareholders' equity of
$59.6 million. The Company's and its subsidiary bank's capital ratios not only
exceeded minimum regulatory guidelines but also the FDIC criteria for "well-
capitalized" banks. See "Regulatory Capital" note to the financial statements
for further discussion.
In 1996, cash dividends paid totaled $1,324,000, a 35% increase from 1995.
The Board increased the quarterly cash dividends in July and October based on
strong earnings and capital. Annualized, the current dividend on the Class A
common and common stock is $.52 per share and $.42 per share, respectively. In
1995, cash dividends paid totaled $979,000, a 12% increase from 1994.
On January 28, 1997, the Company's Board of Directors authorized a stock
repurchase program. The program allows the Company to repurchase up to 4%,
approximately 135,000 shares, of its Class A or common stock over the next 18
months. Repurchases will be made in the open market or through negotiated
transactions from time to time depending on market conditions. The repurchased
stock will be held as treasury stock to be used for general corporate purposes.
As of February 15, 1997, a total of 108,000 shares of Class A common stock had
been repurchased at a cost of $2,532,000.
- --------------------------------------------------------------------------------
New Accounting Pronouncement
In June, 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities," which requires an entity
to recognize the financial and servicing assets it controls and the liabilities
it has incurred and to derecognize financial assets when control has been
surrendered in accordance with the criteria provided in the Statement. The
Company will apply the new rules prospectively to transactions beginning in the
first quarter of 1997. Based on current circumstances, the Company believes the
application of the new rules will not have a material impact on the financial
statements.
18
<PAGE>
Report of Independent Auditors
- --------------------------------------------------------------------------------
Board of Directors and Shareholders
First Oak Brook Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of First Oak Brook
Bancshares, Inc. and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of First Oak Brook
Bancshares, Inc. and subsidiary at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 17, 1997
19
<PAGE>
Consolidated Balance Sheets
First Oak Brook Bancshares, Inc. and Subsidiary
<TABLE>
<CAPTION>
December 31,
-------------------
(Dollars in thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks................................................................. $ 38,816 $ 37,406
Federal funds sold...................................................................... 22,150 --
Interest-bearing deposits with banks.................................................... 289 105
Investment securities:
Securities held-to-maturity, at amortized cost
(fair value, $132,057 and $130,214 for 1996 and 1995)............................... 130,408 128,020
Securities available-for-sale, at fair value.......................................... 135,546 128,172
Loans, net of unearned discount......................................................... 420,164 362,728
Less--Allowance for loan losses......................................................... (4,109) (3,932)
-------------------
Net loans............................................................................. 416,055 358,796
Premises and equipment, net............................................................. 17,470 17,899
Other assets............................................................................ 7,921 7,704
-------------------
Total Assets.............................................................................. $768,655 $678,102
===================
Liabilities and Shareholders' Equity
Noninterest-bearing demand deposits..................................................... $147,497 $128,236
Interest-bearing deposits:
Savings deposits and NOW accounts..................................................... 180,083 191,963
Money market accounts................................................................. 32,027 26,594
Time deposits
Under $100,000...................................................................... 141,291 119,375
$100,000 and over................................................................... 147,405 88,918
-------------------
Total interest-bearing deposits....................................................... 500,806 426,850
-------------------
Total deposits.......................................................................... 648,303 555,086
Federal funds purchased and securities sold under agreements to repurchase.............. 43,205 54,657
Treasury, tax and loan demand notes..................................................... 11,982 6,045
Federal Home Loan Bank advances......................................................... -- 3,500
Other liabilities....................................................................... 5,612 5,052
-------------------
Total Liabilities......................................................................... 709,102 624,340
-------------------
Shareholders' Equity:
Preferred stock, series B, no par value, authorized--100,000 shares, issued--none....... -- --
Class A common stock, $2 par value, (aggregate liquidation preference of $11,702
or $6.31 per share) authorized--4,000,000 shares, issued and outstanding--
1,854,482 shares in 1996 and 1,838,682 shares in 1995................................. 3,709 3,677
Common stock, $2 par value, authorized--3,000,000 shares, issued-1,691,138 shares
in 1996 and 1,695,187 shares in 1995, outstanding--1,518,611 shares in 1996
and 1,524,160 shares in 1995.......................................................... 3,382 3,390
Surplus................................................................................. 10,472 10,368
Unrealized gains on securities available-for-sale, net of taxes......................... 273 356
Retained earnings....................................................................... 42,487 36,704
Less cost of shares in treasury, 172,527 in 1996 and 171,027 common shares in 1995...... (770) (733)
-------------------
Total Shareholders' Equity................................................................ 59,553 53,762
-------------------
Total Liabilities and Shareholders' Equity................................................ $768,655 $678,102
===================
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
Consolidated Statements of Income
First Oak Brook Bancshares, Inc. and Subsidiary
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
(Dollars in thousands except per share amounts) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest on loans.................................................................... $36,163 $32,287 $26,175
Interest on securities:
U.S. Treasury and Government agencies.............................................. 12,139 11,529 10,816
Obligations of states and political subdivisions................................... 2,848 3,098 2,755
Other securities................................................................... 366 326 372
Interest on Federal funds sold and securities purchased under agreements to resell... 943 1,024 963
Interest on deposits with banks...................................................... 13 8 7
---------------------------------------
Total interest income.................................................................. 52,472 48,272 41,088
Interest expense:
Interest on savings deposits and NOW accounts........................................ 6,852 7,785 7,744
Interest on money market accounts.................................................... 900 835 802
Interest on time deposits............................................................ 14,786 10,989 6,156
Interest on Federal funds purchased and securities sold
under agreements to repurchase..................................................... 2,701 2,805 1,535
Interest on Treasury, tax and loan demand notes...................................... 357 188 279
Interest on Federal Home Loan Bank advances.......................................... 42 194 276
---------------------------------------
Total interest expense................................................................. 25,638 22,796 16,792
---------------------------------------
Net interest income.................................................................... 26,834 25,476 24,296
Provision for loan losses.............................................................. 1,510 1,050 1,200
---------------------------------------
Net interest income after provision for loan losses.................................... 25,324 24,426 23,096
---------------------------------------
Other income:
Service charges on deposit accounts.................................................. 2,459 2,333 2,611
Trust and investment management fees................................................. 653 592 444
Other operating income............................................................... 1,599 1,204 1,125
Investment securities gains.......................................................... 14 127 37
---------------------------------------
Total other income..................................................................... 4,725 4,256 4,217
---------------------------------------
Other expenses:
Salaries and employee benefits....................................................... 11,766 10,921 10,169
Occupancy expense.................................................................... 1,430 1,315 1,306
Equipment expense.................................................................... 1,737 1,702 1,664
Data processing...................................................................... 1,625 1,473 1,314
Professional fees.................................................................... 329 259 290
Postage, stationery and supplies..................................................... 752 815 863
Advertising and business development................................................. 1,205 1,394 1,202
FDIC premiums........................................................................ 2 592 1,093
Other operating expenses............................................................. 1,667 1,523 1,391
---------------------------------------
Total other expenses................................................................... 20,513 19,994 19,292
---------------------------------------
Income before provision for income taxes............................................... 9,536 8,688 8,021
Provision for income taxes............................................................. 2,429 1,996 1,827
---------------------------------------
Net income............................................................................. $ 7,107 $ 6,692 $ 6,194
=======================================
Earnings per common share and common equivalent share.................................. $ 2.06 $ 1.95 $ 1.81
=======================================
Weighted average number of common shares and common share equivalents.................. 3,443,119 3,432,164 3,421,203
=======================================
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity
First Oak Brook Bancshares, Inc. and Subsidiary
<TABLE>
<CAPTION>
Unrealized
Class A Gains (Losses)
Common Stock Common Stock on Securities Total
(Dollars in thousands except Par Par Available- Retained Treasury Shareholders'
shares and per share amounts). Shares Value Shares Value Surplus For-Sale Earnings Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993... 1,788,423 $3,577 1,744,717 $3,490 $10,364 $ 1,748 $25,672 $ (733) $44,118
- ------------------------------------------------------------------------------------------------------------------------------------
Net income..................... 6,194 6,194
Conversion of common stock
into Class A common stock.... 47,468 95 (47,468) (95)
Dividends declared,
$.232 per share common and
$.283 per share Class A
common....................... (875) (875)
Exercise of stock options...... (225) (1) 654 1
Unrealized losses on securities
available-for-sale........... (6,528) (6,528)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994.. 1,835,666 $3,671 1,697,903 $3,396 $10,364 $(4,780) $30,991 $ (733) $42,909
- ------------------------------------------------------------------------------------------------------------------------------------
Net income..................... 6,692 6,692
Conversion of common stock
into Class A common stock.... 3,016 6 (3,016) (6)
Dividends declared,
$.275 per share common and
$.330 per share Class A
common..................... (979) (979)
Exercise of stock options...... 300 4 4
Unrealized gains on securities
available-for-sale........... 5,136 5,136
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995... 1,838,682 $3,677 1,695,187 $3,390 $10,368 $ 356 $36,704 $ (733) $53,762
- ------------------------------------------------------------------------------------------------------------------------------------
Net income..................... 7,107 7,107
Conversion of common stock
into Class A common stock.... 15,800 32 (15,800) (32)
Dividends declared,
$.345 per share common and
$.420 per share Class A
common..................... (1,324) (1,324)
Exercise of stock options...... 11,751 24 104 128
Unrealized losses on securities
available-for-sale........... (83) (83)
Purchase of 1,500 shares
of common stock.............. (37) (37)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996... 1,854,482 $3,709 1,691,138 $3,382 $10,472 $ 273 $42,487 $ (770) $59,553
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
Consolidated Statements of Cash Flows
First Oak Brook Bancshares, Inc. and Subsidiary
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
(Dollars in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................................... $ 7,107 $ 6,692 $ 6,194
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation........................................................................ 1,904 1,915 1,949
Discount accretion.................................................................. (557) (388) (212)
Premium amortization................................................................ 1,843 1,916 2,324
Provision for loan losses........................................................... 1,510 1,050 1,200
Investment securities gains......................................................... (14) (127) (37)
Increase in other assets............................................................ (287) (721) (1,163)
Increase (decrease) in other liabilities............................................ 603 1,273 (284)
Amortization of intangible assets................................................... 70 204 265
------------------------------
Net cash provided by operating activities............................................. 12,179 11,814 10,236
------------------------------
Cash flows from investing activities:
Purchase of securities held-to-maturity.............................................. (50,330) (57,458) (75,873)
Purchase of securities available-for-sale............................................ (79,094) (26,447) (65,563)
Proceeds from maturities of securities held-to-maturity.............................. 41,898 70,240 20,160
Proceeds from sales and maturities of securities available-for-sale.................. 76,366 27,797 69,356
Increase in loans.................................................................... (58,769) (54,024) (32,076)
Additions to premises and equipment.................................................. (1,475) (825) (442)
------------------------------
Net cash used in investing activities................................................. (71,404) (40,717) (84,438)
------------------------------
Cash flows from financing activities:
Increase (decrease) in demand deposits............................................... 19,261 18,999 (4,543)
Decrease in savings and NOW accounts................................................. (11,880) (31,391) (8,668)
Increase (decrease) in money market accounts......................................... 5,433 (8) (6,532)
Increase in time deposits............................................................ 80,403 53,863 25,193
Increase (decrease) in Federal funds purchased and securities sold under agreements
to repurchase....................................................................... (11,452) (7,331) 23,339
Increase (decrease) in Treasury, tax and loan demand notes........................... 5,937 (544) (5,265)
Repayment of Federal Home Loan Bank advances......................................... (3,500) (2,500) --
Purchase of treasury stock........................................................... (37) -- --
Exercise of stock options............................................................ 128 4 1
Cash dividends....................................................................... (1,324) (979) (875)
------------------------------
Net cash provided by financing activities............................................. 82,969 30,113 22,650
------------------------------
Net increase (decrease) in cash and cash equivalents.................................. 23,744 1,210 (51,552)
Cash and cash equivalents at beginning of year........................................ 37,511 36,301 87,853
------------------------------
Cash and cash equivalents at end of year.............................................. $ 61,255 $ 37,511 $ 36,301
==============================
Supplemental disclosures:
Interest paid........................................................................ $ 24,495 $ 22,121 $ 16,415
Income taxes paid.................................................................... 2,399 1,926 1,929
==============================
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
Notes to Consolidated Financial Statements
First Oak Brook Bancshares, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of First Oak Brook
Bancshares, Inc. (the Company) and its wholly-owned subsidiary, Oak Brook Bank.
The accounting and reporting policies of the Company and its subsidiary conform
to generally accepted accounting principles and to general practice within the
banking industry.
The Company, through its subsidiary bank, operates in a single segment
engaging in the general retail and commercial banking business, primarily in the
Chicago Metropolitan area. The services offered include demand, savings and time
deposits, corporate cash management services, commercial lending products such
as commercial loans, mortgages and letters of credit, and personal lending
products such as residential mortgages, home equity lines, auto loans and credit
card products. In addition, related products and services are offered including
discount brokerage, mutual funds and annuity sales, and foreign currency and
precious metal sales. The subsidiary bank has a full service trust and land
trust department.
Use of Estimates: The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles 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 and reevaluated as of each balance
sheet date. 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. Available-for-sale securities
are stated at fair value, with the unrealized gains and losses, net of tax,
reported in a separate component of shareholders' equity. The Company does not
carry any securities for trading purposes.
The amortized cost of securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. The cost of securities sold is based on the
specific identification method.
Loan Fees and Related Costs: Loan origination and commitment fees and certain
direct loan origination costs are deferred and amortized as an adjustment of the
related loan's yield over the contractual life of the loan using the level-yield
method.
Allowance for Loan Losses: The allowance for loan losses is comprised of both
general and specific valuation allowances. The Company records specific
valuation allowances on commercial, commercial mortgage and construction loans
when a loan is considered to be impaired. A loan is impaired when, based on an
evaluation of current information and events, it is probable that the Company
will not be able to collect all amounts (principal and interest) due 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. Interest income on impaired loans is recognized using
either the cash basis method or a cost recovery method depending upon the
circumstances. General valuation allowances are maintained at a level believed
adequate by management to absorb estimated probable loan losses. Management's
periodic evaluation of the adequacy of the allowance is based on the Company's
past loan loss experience, peer loan loss experience, known and inherent risks
in the portfolio, composition of the loan portfolio, current economic
conditions, and other relevant factors.
Loans, excluding credit card loans, are placed on non-accrual status when
the collectibility of the contractual principal or interest is deemed doubtful
by management or becomes 90 days or more past due and the loan is not well
secured or in the process of collection.
Premises and Equipment: Premises, leasehold improvements and equipment are
stated at cost less accumulated depreciation and amortization. For financial
reporting purposes, depreciation is charged to expense by the straight-line
method over the estimated useful life of the asset. Leasehold improvements are
amortized over a period not exceeding the term of the lease, including renewal
option periods.
Income Taxes: The Company and its subsidiary file consolidated income tax
returns. The subsidiary provides for income taxes on a separate return basis and
remits to the Company amounts determined to be currently payable. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Earnings Per Common Share and Common Equivalent Share: Earnings per common share
and common equivalent share are computed by dividing net income by the weighted
average number of common shares and common share equivalents outstanding during
the year. Stock options are included in common share equivalents based on the
treasury stock method.
Stock Options: In October, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation." The Statement encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock options and other
equity instruments based on the fair value of those instruments. The Statement
requires that companies with stock-based plans make detailed disclosures about
the plan and instrument terms and assumptions used in measuring the fair value
of stock-based grants.
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting
24
<PAGE>
Notes to Consolidated Financial Statements
First Oak Brook Bancshares, Inc. and Subsidiary
- --------------------------------------------------------------------------------
for Stock Issued to Employees" (APB 25). Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The Company has expanded its disclosure of stock-based compensation plans and
disclosed pro forma data for new grants of stock-based instruments.
Cash and Cash Equivalents: For purposes of the Consolidated Statements of Cash
Flows, cash and cash equivalents include cash and due from banks, Federal funds
sold, securities purchased under agreements to resell and interest bearing
deposits with banks with original maturities of 90 days or less.
- --------------------------------------------------------------------------------
Note 2. 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 or liquidation sale.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported on the balance sheet
for cash and short-term instruments approximate those assets' fair values.
Investment securities: Fair values for investment securities are based on quoted
market prices.
Loans: For variable rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying amounts. The fair value
for all other loans is estimated using discounted cash flow analyses, which use
interest rates currently being offered for similar loans of similar credit
quality. The fair value of the credit card loan portfolio is based on the value
of existing loans at year-end and does not include the value related to
estimated cash flows from new loans generated from existing cardholders. The
fair value does not include potential premiums available in a portfolio sale.
The carrying amount of accrued interest approximates its fair value.
Off-balance sheet instruments: Fair values for the Company's off-balance sheet
instruments (letters of credit and lending commitments) are generally based on
fees currently charged to enter into similar agreements.
Deposit liabilities: The fair values for certain deposits (e.g., interest and
noninterest-bearing demand deposits, savings deposits and NOW accounts) are, by
definition, equal to the amount payable on demand. The fair value estimates do
not include the intangible value of the existing customer base. The carrying
amounts for variable rate money market accounts approximate their fair values.
Fair values for time deposits are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on time deposits
to a schedule of aggregated expected monthly maturities.
Short-term debt: The carrying amounts of Federal funds purchased, overnight
repurchase agreements and Treasury, tax and loan demand notes approximate their
fair values. The fair values of term repurchase agreements are estimated using a
discounted cash flow calculation that utilizes interest rates currently being
offered for similar maturities.
Long-term debt: The fair value of the Federal Home Loan Bank advances is
estimated using a discounted cash flow calculation that utilizes interest rates
currently being offered for similar maturities.
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, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents....... $ 61,255 $ 61,255 $ 37,511 $ 37,511
Investment securities........... 265,954 267,603 256,192 258,386
Loans........................... 420,164 418,209 362,728 362,740
Financial Liabilities
Time deposits................... 288,696 290,392 208,293 211,334
Other deposits.................. 359,607 359,607 346,793 346,793
Short-term debt................. 55,187 55,199 60,702 60,702
Long-term debt.................. -- -- 3,500 3,486
Off-Balance Sheet Commitments
Commercial...................... -- 77 -- 68
Home equity..................... -- 92 -- 92
Credit card..................... -- 209 -- 200
- -------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
Notes to Consolidated Financial Statements
First Oak Brook Bancshares, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Note 3. Cash and Due From Banks
Cash and due from banks include reserve balances that the Company's subsidiary
bank is required to maintain with the Federal Reserve Bank of Chicago. These
required reserves are based principally on deposits outstanding. The average
reserves required for the year ended December 31, 1996 and 1995, were $9,990,000
and $8,688,000, respectively.
- --------------------------------------------------------------------------------
Note 4. Investment Securities
The aggregate amortized cost and fair values of securities, and
gross unrealized gains and unrealized losses at December 31 follow:
<TABLE>
<CAPTION>
1996
---------------------------------------------
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Treasury......................... $ 52,699 $ -- $ 12 $ 52,687
U.S. Government agencies.............. 28,484 68 -- 28,552
Mortgage-backed agency securities..... 24,875 -- 311 24,564
Collateralized mortgage obligations... -- -- -- --
Obligations of states and political
subdivisions......................... 25,888 1,121 -- 27,009
Other securities...................... 2,728 6 -- 2,734
--------------------------------------------
Total securities available-for-sale.. $134,674 $1,195 $323 $135,546
============================================
Securities held-to-maturity:
U.S. Treasury......................... $ 38,454 $ 460 -- $ 38,914
U.S. Government agencies.............. 36,726 193 -- 36,919
Mortgage-backed agency securities..... 29,683 166 -- 29,849
Obligations of states and political
subdivisions......................... 25,475 830 -- 26,305
Other securities...................... 70 -- -- 70
--------------------------------------------
Total securities held-to-maturity.... $130,408 $1,649 $ -- $132,057
============================================
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------------------------
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Treasury......................... $ 56,192 $ 475 $231 $ 56,436
U.S. Government agencies.............. 13,565 25 -- 13,590
Mortgage-backed agency securities..... 26,185 68 263 25,990
Collateralized mortgage obligations... 1,000 13 -- 1,013
Obligations of states and political
subdivisions......................... 27,140 1,265 9 28,396
Other securities...................... 2,734 18 5 2,747
--------------------------------------------
Total securities available-for-sale.. $126,816 $1,864 $508 $128,172
============================================
Securities held-to-maturity:
U.S. Treasury......................... $ 48,731 $ 973 $ -- $ 49,704
U.S. Government agencies.............. 20,235 172 51 20,356
Mortgage-backed agency securities..... 35,693 375 97 35,971
Obligations of states and political
subdivisions......................... 23,197 835 13 24,019
Other securities...................... 164 -- -- 164
---------------------------------------------
Total securities held-to-maturity.... $128,020 $2,355 $161 $130,214
=============================================
</TABLE>
The amortized cost and fair values of investment securities at December 31,
1996, by contractual maturity, are shown below. Mortgage-backed agencies and
collateralized mortgage obligations are presented in the table based on their
estimated average lives, which will differ from contractual maturities due to
principal prepayments. Other securities include preferred stock and Federal
Home Loan Bank of Chicago stock, which have no stated maturity date.
<TABLE>
<CAPTION>
1996
-------------------
Amortized Fair
(in thousands) Cost Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
Securities available-for-sale:
Due in one year or less..................................... $ 22,519 $ 22,608
Due after one year through five years....................... 85,760 85,989
Due after five years through ten years...................... 18,474 18,946
Over ten years.............................................. 5,193 5,269
Other securities............................................ 2,728 2,734
-------------------
$134,674 $135,546
===================
Securities held-to-maturity:
Due in one year or less..................................... $ 24,829 $ 24,939
Due after one year through five years....................... 89,149 90,092
Due after five years through ten years...................... 14,651 15,150
Over ten years.............................................. 1,779 1,876
-------------------
$130,408 $132,057
===================
- -------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
Notes to Consolidated Financial Statements
First Oak Brook Bancshares, Inc. and Subsidiary
- --------------------------------------------------------------------------------
On November 15, 1995, the Financial Accounting Standards Board staff issued a
Special Report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investment in Debt and Equity Securities." In accordance with the
provisions in that Special Report, in December 1995, the Company reclassified
certain securities from held-to-maturity to available-for-sale. At the date of
transfer, the amortized cost of those securities was $33,425,000 and the
unrealized gain on those securities was $1,377,000. In December, 1995, the
Company also reclassified certain securities from available-for-sale to held-to-
maturity. At the date of transfer, the aggregate fair market value of those
securities was $28,375,000, which approximated amortized cost.
At December 31, 1996, investment securities with a book value of $224,964,000
were pledged as collateral to secure certain deposits and for other purposes as
required by law.
Proceeds from sales of investments in debt and equity securities during 1996,
1995 and 1994 were $8,025,000, $8,967,000 and $27,068,000, respectively. Gross
gains of $21,000 and gross losses of $7,000 were realized on those sales in
1996. Gross gains of $138,000 and gross losses of $11,000 were realized on those
sales in 1995. Gross gains of $238,000 and gross losses of $201,000 were
realized on those sales in 1994.
- --------------------------------------------------------------------------------
NOTE 5. LOANS
Loans outstanding at December 31 follow:
<TABLE>
<CAPTION>
1996 1995
----------------------- ----------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial................................ $ 40,895 $ 40,666 $ 38,171 $ 37,637
Real estate-
Construction............................. 35,902 35,502 28,770 28,770
Residential mortgage..................... 93,730 92,215 81,226 81,545
Commercial mortgage...................... 63,394 63,013 55,437 55,779
Home equity loans........................ 55,297 55,316 47,357 47,318
Credit card loans......................... 58,114 58,057 58,592 58,487
Consumer installment loans................ 73,571 73,440 54,420 53,204
-----------------------------------------------------
Total loans............................. 420,903 418,209 363,973 362,740
Less unearned discount.................... (739) -- (1,245) --
-----------------------------------------------------
Loans, net of unearned discount......... $420,164 $418,209 $362,728 $362,740
=====================================================
</TABLE>
The Company grants real estate, commercial and consumer installment loans
primarily within the Chicago Metropolitan area. Credit cards are issued
throughout the country, although approximately 33% are issued to customers in
Illinois. No other state contains a significant concentration of credit card
customers. Generally, real estate and consumer installment loans are secured by
various items of property such as first and second mortgages, automobiles and
cash collateral. The majority of the commercial portfolio is secured by business
assets. The credit card portfolio is unsecured.
Loans secured by real estate are expected to be paid by the borrowers' cash
flows or proceeds from the sale or refinancing of the underlying real estate.
Almost all of these loans are secured by real estate within the Chicago
Metropolitan area. Performance of these loans may be affected by conditions
influencing the local economy and real estate market. However, the Company's
loan policy addresses this issue, as funds loaned for portfolio loans generally
may not exceed eighty percent of the appraised value of the real estate. Real
estate loans sold in the secondary market can be funded at higher loan to value
ratios. If real estate loans sold in the secondary market become delinquent
within the first six months from the date of sale, the investor may require the
Company to repurchase the loan.
The credit card portfolio is expected to be repaid from customers' cash flows.
The Company's approval policies for issuing a credit card require an analysis of
applications and credit reports to ensure sufficient income and/or assets,
satisfactory debt to income ratios, and satisfactory past credit history. A
general downturn in the economy causing a rise in unemployment may increase
credit card losses.
In the normal course of business, there are various outstanding commitments
and contingent liabilities, including commitments to extend credit, that are not
reflected in the financial statements. The Company's exposure to credit loss in
the event of nonperformance by the other party to the commitments and lines of
credit is limited to their contractual amount. Many commitments to extend credit
expire without being used, or, in the case of credit cards, the Company, at its
discretion, may cancel any credit card line. Additionally, some credit card
lines are drawn down and paid off monthly. Therefore, the amounts stated below
do not necessarily represent future cash commitments. These commitments
(including letters of credit) and credit lines are subject to the same credit
policies followed for loans recorded in the financial statements.
27
<PAGE>
Notes to Consolidated Financial Statements
First Oak Brook Bancshares, Inc. and Subsidiary
- --------------------------------------------------------------------------------
A summary of these commitments to extend credit at December 31 follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Commercial............................................. $ 89,797 $ 62,225
Home equity............................................ 66,772 59,536
Credit card............................................ 305,061 313,523
</TABLE>
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year.................. $ 3,932 $ 3,859 $ 3,231
Provision for loan losses..................... 1,510 1,050 1,200
Recoveries.................................... 178 135 163
Charge-offs................................... (1,511) (1,112) (735)
------------------------------
Balance at end of year........................ $ 4,109 $ 3,932 $ 3,859
==============================
</TABLE>
At December 31, 1996, the recorded investment in loans considered impaired was
$1,730,000. The allowance for loan losses related to impaired loans was
$400,000. The average recorded investment in impaired loans was approximately
$699,000 for the year ended December 31, 1996. The Company did not recognize any
interest income associated with impaired loans during the year. If interest on
those loans had been accrued at their original terms, such income would
approximate $101,000 in 1996. The Company had no impaired loans, as defined,
during 1995.
The Company's bank subsidiary has granted loans to its officers and directors,
as well as to the officers and directors of the Company and to their associates.
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 $6,571,000 and
$5,463,000 at December 31, 1996 and 1995, respectively. During 1996, new loans
totaled $5,539,000 and repayments totaled $4,431,000.
Certain principal shareholders of the Company are also principal shareholders
of Amalgamated Investments Company, parent of Amalgamated Bank of Chicago. The
Company's subsidiary bank has purchased from or sold participations in loans to
Amalgamated Bank of Chicago. At December 31, 1996 and 1995, the Company had
outstanding loan participations sold of $1,049,000 and $2,107,000, respectively,
with Amalgamated Bank of Chicago.
- --------------------------------------------------------------------------------
NOTE 6. PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Land......................................................$ 2,652 $ 2,621
Buildings and improvements................................ 15,247 15,141
Leasehold improvements.................................... 985 975
Data processing equipment, office equipment and furniture. 10,114 9,006
28,998 27,743
Less accumulated depreciation and amortization............ (11,528) (9,844)
---------------------
Premises and equipment, net........ $ 17,470 $17,899
=====================
</TABLE>
The Company has entered into a number of noncancellable operating lease
agreements for certain of its subsidiary bank's office premises. The minimum
annual net rental commitments under these leases at December 31, 1996, are as
follows:
<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------
<S> <C>
1997.......................... $156
1998.......................... 121
1999.......................... 89
2000.......................... 78
2001.......................... 48
2002 and thereafter........... 41
----
$533
====
</TABLE>
Total rental expense for 1996, 1995 and 1994 was approximately $193,000,
$188,000 and $189,000, respectively, which included payment of certain occupancy
expenses as defined in the lease agreements.
The Company's aggregate future minimum net rentals to be received under
noncancellable leases from third party tenants are as follows:
<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------
<S> <C>
1997........................ $ 341
1998........................ 325
1999........................ 326
2000........................ 335
2001........................ 310
------
$1,637
======
</TABLE>
The Company also receives reimbursement from its tenants for certain occupancy
expenses including taxes, insurance and operational expenses, as defined in the
lease agreements.
28
<PAGE>
Notes to Consolidated Financial Statements
First Oak Brook Bancshares, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Note 7. Short-Term Borrowings
Federal funds purchased, securities sold under agreements to repurchase
("repos") and Treasury, tax and loan demand notes constitute all of the
Company's short-term borrowings. The repos generally mature within one to ninety
days from the various dates of sale and have the characteristics of secured
borrowings. The variable rate Treasury, tax and loan demand notes can be called
by the Federal Reserve Bank at any time and are due on demand. The Company
maintains qualifying collateral, including U.S. Treasuries and municipal
securities.
<TABLE>
<CAPTION>
Short-Term Borrowings
(in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Amount outstanding:
At year end..................................... $55,187 $60,702 $68,577
Average during year............................. 60,753 56,245 46,612
Maximum month-end............................... 73,804 69,490 68,577
Average interest rate:
At year end..................................... 5.44% 5.05% 5.02%
During the year................................. 5.03% 5.32% 3.89%
---------------------------
- -----------------------------------------------------------------------------
</TABLE>
Note 8. Income Taxes
The components of the provision for income taxes for the three years in the
period ended December 31 follow:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Current provision................................ $2,715 $2,375 $1,874
Deferred benefit................................. (286) (379) (47)
--------------------------
Total provision for income taxes................. $2,429 $1,996 $1,827
==========================
</TABLE>
The tax expense related to investment securities gains for 1996, 1995 and 1994
totaled $5,000, $43,000 and $13,000, respectively.
The net deferred tax asset at December 31 consists of the following:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- --------------------------------------------------------------------------------
Gross deferred tax liabilities:
<S> <C> <C>
Unrealized gain on securities
available-for-sale....................................... $ 141 $ 184
Accretion of discount on securities........................ 401 229
Tax over book depreciation................................. 421 450
Purchase accounting adjustments............................ 15 39
Other, net................................................. 61 166
----------------
Total deferred tax liabilities........................... 1,039 1,068
Gross deferred tax assets:
Book over tax loan loss reserve............................ 1,592 1,269
Deferred expenses.......................................... 120 143
----------------
Total deferred tax assets................................. 1,712 1,412
----------------
Net deferred tax asset.................................... $ 673 $ 344
</TABLE> ================
- --------------------------------------------------------------------------------
The effect of significant temporary differences on the deferred tax benefit for
the three years in the period ended December 31 follow:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred expenses.................................. $ 23 $ (43) $ 31
Accretion of discount on
securities........................................ 172 29 20
Tax over book depreciation......................... (29) 35 140
Book over tax loan loss reserve.................... (323) (232) (359)
Purchase accounting adjustments.................... (24) (115) (68)
Other, net......................................... (105) (53) 189
-------------------------
Deferred benefit.................................. $(286) $(379) $ (47)
=========================
</TABLE>
The effective tax rates for 1996, 1995 and 1994 were 25%, 23% and 23%,
respectively. Income tax expense was less than the amounts computed by applying
the Federal statutory rate of 34% (for companies with taxable income less than
$10 million) for all years because of the following:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at statutory rate..................... $3,243 $ 2,954 $2,727
Increase (decrease) in taxes
resulting from:
Income from obligations of
states and political
subdivisions and certain
loans not subject to
Federal income taxes........................... (873) (1,007) (938)
Other, net...................................... 59 49 38
--------------------------
Total provision for income taxes.................. $2,429 $ 1,996 $1,827
==========================
</TABLE>
Note 9. Shareholders' Equity
Each share of Class A common stock is entitled to one-twentieth of one vote and
a cash dividend of at least 120% of the dividend declared on the common stock.
Holders of the Class A common stock, upon liquidation of the Company, are
entitled to receive an aggregate amount per share equal to the $6.31 offering
price of the Class A common stock before any amount is paid to holders of the
common stock.
The common stock is convertible into Class A common stock on a one-for-one
basis at any time.
29
<PAGE>
Notes to Consolidated Financial Statements
First Oak Brook Bancshares, Inc. and Subsidiary
- --------------------------------------------------------------------------------
On July 19, 1994, the Company declared a 50% stock dividend on common and
Class A common which was distributed September 8, 1994.
At December 31, 1996, the Company has reserved for issuance 327,795 shares of
common stock and 2,018,933 shares of Class A common stock.
Payment of dividends by the Company's subsidiary 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, 1996, $10,315,000 of undistributed earnings was available for the
payment of dividends by the subsidiary bank without prior regulatory approval.
- --------------------------------------------------------------------------------
Note 10. Regulatory Capital
The Company and its bank subsidiary are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and its bank subsidiary must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. Capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Regulations require the Company and its bank subsidiary to maintain minimum
amounts of total and Tier 1 capital, minimum ratios of total and Tier 1 capital
to risk-weighted assets, and a minimum ratio of Tier 1 capital to average assets
to ensure capital adequacy. Management believes, as of December 31, 1996, that
the Company and its bank subsidiary meet all capital adequacy requirements to
which they are subject.
The Company and its bank subsidiary's actual capital amounts and ratios are
presented in the table below. As of December 31, 1996, the most recent
regulatory notification categorized the bank subsidiary as well capitalized.
There are no conditions or events since that notification that management
believes have changed the institutions's category.
<TABLE>
<CAPTION>
Capital Required To Be
------------------------------------
Adequately Well
Actual Capitalized Capitalized
--------------- ---------------- --------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk Weighted Assets)
Consolidated............................. $63,330 13.54% $37,429 8% $46,786 10%
Oak Brook Bank........................... 55,579 11.90 37,354 8 46,692 10
Tier 1 Capital (to Risk Weighted Assets)
Consolidated............................. $59,221 12.66% $18,714 4% $28,072 6%
Oak Brook Bank........................... 51,470 11.02 18,677 4 28,015 6
Tier 1 Capital (to Average Assets)
Consolidated............................. $59,221 7.69% $30,801 4% $38,501 5%
Oak Brook Bank........................... 51,470 6.70 30,726 4 38,407 5
As of December 31, 1995:
Total Capital (to Risk Weighted Assets)
Consolidated............................. $57,250 14.32% $31,994 8% $39,992 10%
Oak Brook Bank........................... 49,989 12.53 31,926 8 39,907 10
Tier 1 Capital (to Risk Weighted Assets)
Consolidated............................. $53,318 13.33% $15,997 4% $23,995 6%
Oak Brook Bank........................... 46,057 11.54 15,963 4 23,944 6
Tier 1 Capital (to Average Assets)
Consolidated............................. $53,318 7.94% $26,860 4% $33,575 5%
Oak Brook Bank........................... 46,057 6.88 26,778 4 33,472 5
</TABLE>
30
<PAGE>
Notes to Consolidated Financial Statements
First Oak Brook Bancshares, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Note 11. Contingent Liabilities
The Company and its subsidiary bank are not subject to any pending or threatened
legal actions as of December 31, 1996.
- --------------------------------------------------------------------------------
Note 12. Stock-Based Compensation
The Company has a nonqualified stock option plan for officers and directors.
Options may be granted at a price not less than the market value on the date of
grant, and are subject to a 3 or 5 year vesting schedule and are exercisable, in
part, beginning at least one year following the date of grant and no later than
ten years from date of grant.
Pro forma information regarding net income and earnings per share is
required by Statement No. 123 and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995, respectively: risk-free interest rates of 6.4%
and 5.5%; dividend yields of 3.1% and 2.4%; volatility factor of the expected
market price of the Company's common stock of .18; and a weighted-average
expected life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (dollars in thousands, except for earnings per
share ):
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Net income as reported.......................................... $7,107 $6,692
Pro forma net income............................................ $7,071 $6,690
Earnings per share as reported.................................. $ 2.06 $ 1.95
Pro forma earnings per share.................................... $ 2.05 $ 1.95
Weighted-average fair value of
options granted during the year................................ $ 4.45 $ 4.18
</TABLE>
Because Statement No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1997.
A summary of the Company's stock option activity, and related information for
the year ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ------------------ ------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the beginning
of the year........................ 271,869 $12.06 209,369 $ 9.51 164,523 $ 7.41
Granted............................. 52,501 22.79 64,500 20.44 54,500 16.72
Exercised........................... (11,751) 5.51 (300) 14.93 (654) 5.51
Forfeited........................... (3,000) 20.50 (1,700) 15.39 (9,000) 15.18
------- ------- -------
Outstanding at the end of the year.. 309,619 14.04 271,869 12.06 209,369 9.51
======= =======
Exercisable at the end of the year.. 169,044 $ 9.26 150,969 $ 7.32 124,382 $ 6.27
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged from
$5.24 to $24.00 per share. The weighted-average remaining contractual life of
those options is 6.2 years.
31
<PAGE>
Notes to Consolidated Financial Statements
First Oak Brook Bancshares, Inc. and Subsidiary
- -------------------------------------------------------------------------------
Note 13. Employee Benefit Plans
The Company has a 401(k) savings plan that allows eligible employees to defer a
percentage of their salary, not to exceed 10%, which will be matched by the
Company based on a formula tied to Company profits. The maximum Company
liability is 4% of aggregate eligible salaries. For 1996, 1995 and 1994, the
Company's contributions to the plan were $246,000, $205,000 and $190,000,
respectively.
The Company also has an integrated stock bonus plan, under which the Company,
at its discretion, could contribute up to the maximum amount deductible for the
year. The Company contributed $128,000 in 1996, $130,000 in 1995 and $121,000 in
1994.
- --------------------------------------------------------------------------------
Note 14. Parent Company Only Financial Information
The following are the condensed balance sheets of
income and cash flows for First Oak Brook Bancshares, Inc.:
<TABLE>
<CAPTION> December 31,
Balance Sheets (Parent Company Only) -----------------
(in thousands) 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents on deposit with subsidiary.............................. $ 6,884 $ 5,314
Investment in subsidiary (including intangibles of $85 in 1996 and $155 in 1995).. 51,825 46,560
Securities available-for-sale..................................................... 1,746 1,680
Due from subsidiary............................................................... 96 810
Equipment, net.................................................................... 141 146
Other assets...................................................................... 22 44
----------------
Total assets..................................................................... $60,714 $54,554
================
Liabilities and Shareholders' Equity
Other liabilities................................................................. $ 1,161 $ 792
----------------
Total liabilities................................................................ 1,161 792
Shareholders' equity.............................................................. 59,553 53,762
----------------
Total liabilities and shareholders' equity....................................... $60,714 $54,554
================
</TABLE>
Statements of Income (Parent Company Only)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiary......................................................... $ 2,108 $ 3,967 $ 3,725
Other income...................................................................... 2,140 1,887 1,670
-------------------------
Total income..................................................................... 4,248 5,854 5,395
-------------------------
Expenses:
Other expenses.................................................................... 2,740 2,629 2,470
-------------------------
Total expenses................................................................... 2,740 2,629 2,470
-------------------------
Income before income taxes and equity in undistributed net income of subsidiary.... 1,508 3,225 2,925
Income tax benefit................................................................ 186 190 193
-------------------------
Income before equity in undistributed net income of subsidiary..................... 1,694 3,415 3,118
Equity in undistributed net income of subsidiary.................................. 5,413 3,277 3,076
-------------------------
Net income......................................................................... $ 7,107 $ 6,692 $ 6,194
=========================
- --------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
Notes to Consolidated Financial Statements
First Oak Brook Bancshares, Inc. and Subsidiary
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Statements of Cash Flows (Parent Company Only) Year Ended December 31,
---------------------------
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................................................... $ 7,107 $ 6,692 $ 6,194
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation...................................................................... 43 39 28
Investment securities losses...................................................... 7 6 --
Decrease (increase) in other assets............................................... 22 37 (22)
Increase in other liabilities..................................................... 371 117 209
Decrease (increase) in due from subsidiary........................................ 714 (260) (281)
Equity in undistributed net income of subsidiary.................................. (5,413) (3,277) (3,076)
Amortization of intangibles....................................................... 70 204 199
Other............................................................................. (48) 28 (22)
---------------------------
Net cash provided by operating activities............................................. 2,873 3,586 3,229
Cash flows from investing activities:
Sales (purchases) of investment securities.......................................... (32) 2,625 (2,223)
Additions to equipment.............................................................. (38) (28) (101)
---------------------------
Net cash provided by (used in) investing activities................................... (70) 2,597 (2,324)
Cash flows from financing activities:
Exercise of stock options........................................................... 128 4 1
Purchase of treasury stock.......................................................... (37) -- --
Cash dividends...................................................................... (1,324) (979) (875)
---------------------------
Net cash used in financing activities................................................. (1,233) (975) (874)
---------------------------
Net increase in cash and cash equivalents............................................. 1,570 5,208 31
Cash and cash equivalents at beginning of year........................................ 5,314 106 75
---------------------------
Cash and cash equivalents at end of year.............................................. $ 6,884 $ 5,314 $ 106
===========================
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
Corporate and Shareholder Information
First Oak Brook Bancshares, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Directors and Officers
Executive Officer Directors
Eugene P. Heytow, Chairman of the Board and
Chief Executive Officer
Richard M. Rieser, Jr., President
Frank M. Paris, Vice Chairman
Non-Officer Directors
Miriam Lutwak Fitzgerald, M.D.
Geoffrey R. Stone, Provost of the University of Chicago
Alton M. Withers, Executive Vice President and
Chief Financial Officer, Spiegel, Inc. (retired)
Robert M. Wrobel, President, Amalgamated Bank of Chicago
Senior Corporate Officers
Rosemarie Bouman, Vice President, Chief Financial Officer
and Treasurer
Mary C. Carnevale, Vice President and Chief Human
Resources Officer
George C. Clam, Vice President and Chief Banking Officer
William E. Navolio, Vice President, General Counsel,
and Secretary
Susanne C. Griffith, Auditor
- --------------------------------------------------------------------------------
Corporate Office
The Corporate Office is located at 1400 Sixteenth Street, Oak Brook, Illinois
60521. The telephone number is (630) 571-1050. You can E-mail us at [email protected].
Annual Meeting
The Annual Meeting of Shareholders will be held at 10 a.m. on Tuesday, May 6,
1997, in the Conference Center at 1400 Sixteenth Street, Oak Brook, Illinois
60521.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Stock Data
Per Share
---------------------------------------------------------------------------
Dividends Paid Class A/1/
Net -------------------- Book -------------------------
Quarter Ended Income Class A Common Value Low Price High Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996...................................... $.61 $.110 $.090 $17.26 $21.13 $23.75
September 30, 1996..................................... .50 .090 .075 16.52 21.25 25.50
June 30, 1996.......................................... .50 .090 .075 15.94 22.50 24.75
March 31, 1996......................................... .44 .090 .075 15.69 20.50 24.25
December 31, 1995...................................... .65 .090 .075 15.64 20.25 21.25
September 30, 1995..................................... .49 .075 .063 14.70 17.75 21.50
June 30, 1995.......................................... .40 .075 .063 14.26 17.00 19.50
March 31, 1995......................................... .41 .075 .063 13.37 16.50 19.00
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/The prices shown represent the high and low closing sales price for the
quarter.
Class A Common Stock
The Company's Class A Common Stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market/SM/. As of January 31, 1997, there were approximately
179 holders of record of Class A Common Stock; however, the Company believes the
number of beneficial owners is substantially greater. Current market makers in
the Class A Common Stock are The Chicago Corporation; Everen Securities, Inc.;
Howe Barnes Investments, Inc.; Keefe, Bruyette & Woods, Inc. and M.A. Schapiro &
Co., Inc.
Common Stock
The Company's Common Stock is traded in the over-the-counter market through
market makers, primarily The Chicago Corporation. As of January 31, 1997, there
were approximately 214 holders of record of Common Stock.
Since the offering of the Class A Common Stock there has been limited
trading of the Common Stock; therefore, prices of the Common Stock are not
shown. The Common Stock is, however, convertible on a one-for-one basis into the
Class A Common Stock. As of January 31, 1997, a total of 884,170 shares of
Common Stock have been converted into Class A Common Stock.
- --------------------------------------------------------------------------------
Nasdaq Symbol for Class A Common Stock
FOBBA
Transfer Agent and Registrar
The transfer agent and registrar is Oak Brook Bank, 1400 Sixteenth Street, Oak
Brook, Illinois 60521.
Form 10-K
Any individual requesting a copy of the Company's 1996 Form 10-K Annual Report
filed with the Securities and Exchange Commission may obtain it without charge
by writing to Rosemarie Bouman, Vice President and Chief Financial Officer, at
the Corporate Office. The 1996 Form 10-K may also be obtained from the SEC's
EDGAR database which is directly linked to the Company's Web site at
http://www.obb.com.
34
<PAGE>
Notes
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40
<PAGE>
EXHIBIT (21)
SUBSIDIARIES OF THE REGISTRANT
The Company's subsidiary is incorporated in the State of Illinois and does
business under its own name.
OAK BROOK BANK (100%)
<PAGE>
EXHIBIT (23)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of First Oak Brook Bancshares, Inc. of our report dated January 17, 1997,
included in the 1996 Annual Report to Shareholders of First Oak Brook
Bancshares, Inc.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-24145) pertaining to First Oak Brook Bancshares, Inc.
Employees' Savings and Stock Ownership Plan and the Registration Statement (Form
S-8 No. 33-82800) pertaining to First Oak Brook Bancshares, Inc. 1987 Stock
Option Plan of our report dated January 17, 1997, with respect to the
consolidated financial statements of First Oak Brook Bancshares, Inc.
incorporated by reference in the Annual Report (Form 10-K) for the year ended
December 31, 1996.
ERNST & YOUNG LLP
Chicago, Illinois
March 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND> This schedule contains summary financial information extracted from
SEC Form 10-K and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 38,816
<INT-BEARING-DEPOSITS> 289
<FED-FUNDS-SOLD> 22,150
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 135,546
<INVESTMENTS-CARRYING> 130,408
<INVESTMENTS-MARKET> 132,057
<LOANS> 420,164
<ALLOWANCE> 4,109
<TOTAL-ASSETS> 768,655
<DEPOSITS> 648,303
<SHORT-TERM> 55,187
<LIABILITIES-OTHER> 5,612
<LONG-TERM> 0
<COMMON> 7,091
0
0
<OTHER-SE> 52,472
<TOTAL-LIABILITIES-AND-EQUITY> 768,655
<INTEREST-LOAN> 36,163
<INTEREST-INVEST> 15,353
<INTEREST-OTHER> 956
<INTEREST-TOTAL> 52,472
<INTEREST-DEPOSIT> 22,538
<INTEREST-EXPENSE> 25,638
<INTEREST-INCOME-NET> 26,834
<LOAN-LOSSES> 1,510
<SECURITIES-GAINS> 14
<EXPENSE-OTHER> 20,513
<INCOME-PRETAX> 9,536
<INCOME-PRE-EXTRAORDINARY> 9,536
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,107
<EPS-PRIMARY> 2.06
<EPS-DILUTED> 2.06
<YIELD-ACTUAL> 4.20
<LOANS-NON> 1,730
<LOANS-PAST> 349
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,932
<CHARGE-OFFS> 1,511
<RECOVERIES> 178
<ALLOWANCE-CLOSE> 4,109
<ALLOWANCE-DOMESTIC> 4,109
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
