<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission file number 0-14468
-------
First Oak Brook Bancshares, Inc.
---------------------------------------
(Exact Name of registrant as specified in its charter)
Delaware 36-3220778
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 Sixteenth Street, Oak Brook, Illinois 60523
- ------------------------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (630) 571-1050
----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate number of shares outstanding of each of the issuer's classes of common
stock, as of October 31, 1998.
Class A 3,686,772
- ------------------------------------------- ------------------
CLASS NUMBER OF SHARES
Common 2,915,938
- ------------------------------------------- ------------------
CLASS NUMBER OF SHARES
<PAGE>
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
INDEX
Page
----
Part I. Financial Information
- ------------------------------
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets
September 30, 1998 and December 31, 1997 3
Condensed consolidated statements of income
Three months ended September 30, 1998 and 1997 and
Nine months ended September 30, 1998 and 1997 5
Condensed consolidated statements of cash flows
Nine months ended September 30, 1998 and 1997 7
Notes to condensed consolidated financial
statements -- September 30, 1998 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Part II. Other Information
- ---------------------------
Item 1. Legal Proceedings *
Item 2. Changes in Securities *
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
- ----------
* Not applicable
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(In Thousands)
September 30, December 31,
1998 1997
---- ----
(unaudited)
Assets
- ------
Cash and due from banks $ 35,160 $ 32,893
Federal funds sold and securities
purchased under agreement to resell 35,615 -
Interest-bearing deposits
with banks 11,290 10,239
Securities held-to-maturity, at
amortized cost (fair value $131,145
and $145,639 at September 30, 1998
and December 31, 1997) 127,545 142,682
Securities available-for-sale, at
fair value 154,310 159,416
Loans, net of unearned discount 572,251 447,332
Less allowance for loan losses (4,044) (4,329)
------- -------
Net loans 568,207 443,003
------- -------
Premises and equipment, net 20,442 18,773
Other assets 9,378 9,138
------- -------
Total assets $ 961,947 $ 816,144
======== ========
-3-
<PAGE>
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (Cont.)
(In Thousands Except Share Information)
September 30, December 31,
1998 1997
---- ----
(unaudited)
Liabilities
- -----------
Noninterest-bearing demand deposits $175,536 $153,806
------- -------
Interest-bearing deposits:
Savings deposits and interest
bearing checking accounts 174,809 166,040
Money market accounts 41,131 33,139
Time deposits
Under $100,000 179,080 113,839
$100,000 and over 176,168 160,939
------- -------
Total interest-bearing deposits 571,188 473,957
------- -------
Total deposits 746,724 627,763
------- -------
Federal funds purchased and securities
sold under agreements to repurchase 58,313 52,608
Treasury, tax and loan demand notes 15,675 12,508
Federal Home Loan Bank borrowings 56,000 42,500
Other liabilities 9,269 9,104
------- -------
Total liabilities 885,981 744,483
------- -------
Shareholders' Equity
- --------------------
Class A Common Stock (aggregate
liquidation preference of $11,657) 8,039 7,946
Common stock 6,528 6,596
Surplus 11,956 11,802
Accumulated other comprehensive income 2,843 1,644
Retained earnings 52,308 47,258
Less cost of shares in treasury,
330,500 Class A and 348,046 Common
shares in 1998 and 236,000 Class A
and 348,046 Common shares in 1997 (5,708) (3,585)
------- -------
Total shareholders' equity 75,966 71,661
------- -------
Total liabilities and
shareholders' equity $961,947 $816,144
======= =======
See Notes to Condensed Consolidated Financial Statements.
-4-
<PAGE>
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
1998 1997 1998 1997
---------------- ----------------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $ 10,403 $ 8,156 $29,336 $27,478
Interest on securities:
U.S. Treasury and Government
agencies 3,778 4,145 10,996 10,604
Obligations of states and political
subdivisions 664 626 1,901 1,886
Other securities 329 252 929 355
Interest on Federal funds sold and
securities purchased under
agreements to resell 655 119 1,700 418
Interest on deposits with banks 194 175 570 182
------ ------ ------ ------
Total interest income 16,023 13,473 45,432 40,923
------ ------ ------ ------
Interest expense:
Interest on savings deposits and
NOW accounts 1,437 1,534 4,395 4,650
Interest on money market accounts 345 273 937 806
Interest on time deposits 5,147 4,358 14,730 11,989
Interest on Federal funds purchased
and securities sold under
agreements to repurchase 672 619 1,840 1,851
Interest on Treasury, tax and loan
demand notes 145 113 414 401
Interest on Federal Home Loan Bank
borrowings 820 186 2,414 348
------ ------ ------- ------
Total interest expense 8,566 7,083 24,730 20,045
------ ------ ------ ------
Net interest income 7,457 6,390 20,702 20,878
Provision for loan losses 90 - 240 1,550
Net interest income after provision ------ ------ ------ ------
for loan losses $ 7,367 $ 6,390 $20,462 $19,328
------ ------ ------ ------
</TABLE>
-5-
<PAGE>
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Cont.)
(Unaudited)
(In Thousands Except Share Information)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
1998 1997 1998 1997
---------------- -----------------
<S> <C> <C> <C> <C>
Other income:
Service charges on deposit accounts $ 826 $ 674 $ 2,390 $ 2,028
Investment management and trust fees 257 245 762 742
Merchant card processing fees 351 248 976 716
Other operating income 616 547 1,738 1,035
Investment securities gains (losses) - - 79 (9)
Gain on sale of credit card portfolio - - - 9,117
----- ----- ------ ------
Total other income 2,050 1,714 5,945 13,629
----- ----- ----- ------
Other expenses:
Salaries and employee benefits 3,601 3,003 10,487 9,241
Occupancy expense 374 359 1,133 1,099
Equipment expense 531 380 1,394 1,161
Data processing 212 181 558 1,054
Professional fees 131 90 375 306
Postage, stationery and supplies 192 194 628 561
Advertising and business development 307 292 881 1,045
FDIC premiums 21 19 60 59
Gain on other real estate owned - - - (515)
Other operating expenses 531 410 1,395 1,384
----- ----- ------ ------
Total other expenses 5,900 4,928 16,911 15,394
----- ----- ------ ------
Income before provision for income
taxes 3,517 3,176 9,496 17,563
Provision for income taxes 1,038 946 2,758 5,994
----- ----- ----- ------
Net income $2,479 $2,230 $ 6,738 $11,569
===== ===== ====== ======
Earnings per common share:
Basic $ .37 $ .34 $ 1.01 $ 1.76
===== ===== ====== =======
Diluted $ .37 $ .33 $ .99 $ 1.71
===== ===== ====== =======
Dividends per share:
Class A Common $ .090 $ .065 $ .270 $ .195
Common .075 .053 .225 .158
===== ===== ====== =====
Weighted average number of common shares:
Basic 6,632,127 6,560,401 6,666,533 6,573,276
========= ========= ========= =========
Diluted 6,789,943 6,787,678 6,834,588 6,762,384
========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-6-
<PAGE>
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,738 $ 11,569
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on credit card portfolio sale -- (9,117)
Depreciation, discount accretion, premium
amortization and amortization of intangibles 1,670 1,857
Provision for loan losses 240 1,550
Investment securities (gains) losses (79) 9
Increase in other assets (994) (694)
Increase in other liabilities (453) 8,146
--------- ---------
Net cash provided by operating activities 7,122 13,320
--------- ---------
Cash flows from investing activities:
Purchase of domestic certificates of deposit -- (10,000)
Purchase of securities held-to-maturity (34,506) (79,147)
Purchase of securities available-for-sale (34,207) (83,939)
Proceeds from maturities, calls and paydowns
of securities held-to-maturity 50,041 51,709
Proceeds from sales, maturities, calls and
paydowns of securities available-for-sale 40,861 57,636
Proceeds from credit card portfolio sale -- 64,000
Increase in loans (125,444) (49,289)
Additions to premises and equipment (3,357) (1,746)
--------- ---------
Net cash used in investing activities (106,612) (50,776)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in demand deposits 21,730 (688)
Increase (decrease)in savings and interest
bearing checking accounts 8,769 (11,554)
Increase in money market accounts 7,992 487
Increase in time deposits 80,470 12,207
Increase in securities sold under
agreements to repurchase 5,705 5,687
Increase in treasury, tax and
loan demand notes 3,167 6,723
Proceeds from Federal Home Loan Bank borrowings 41,000 17,500
Repayment of Federal Home Loan Bank borrowings (27,500) --
Exercise of stock options 173 471
Purchase of treasury stock (2,123) (2,815)
Cash dividends (1,682) (1,251)
--------- ---------
Net cash provided by financing activities 137,701 26,767
--------- ---------
</TABLE>
-7-
<PAGE>
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net increase (decrease) in cash and
cash equivalents 38,211 (10,689)
Cash and cash equivalents at beginning
of period 32,954 61,255
------ ------
Cash and cash equivalents at end of
period $71,165 $50,566
====== ======
Supplemental disclosures:
Interest paid $24,303 $20,157
Income taxes paid 2,184 4,643
===== ======
</TABLE>
See notes to Condensed Consolidated Financial Statements.
-8-
<PAGE>
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Unaudited)
1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring items) considered necessary
for a fair presentation have been included. Operating results for the three
and nine months period ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1998. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on
Form 10-K for the year ended December 31, 1997.
2. New Accounting Pronouncements:
In October 1998, the Financial Accounting Standards Board issued Statement
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise" which is effective the first fiscal quarter after December 15,
1998. This statement amends Statement 65 "Accounting for Certain Mortgage
Banking Activities". This statement revises the accounting for retained
securities and beneficial interests along with the classification of the
retained securities and beneficial interests. Management of the Company does
not expect that the adoption of Statement 134 will have a material effect on
the consolidated financial statements of the Company.
In June 1998, the Financial Accounting Standards Board adopted Statement
133, "Accounting for Derivative Instruments and Hedging Activities."
Statement 133 standardizes the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts. Under
the standard, entities are required to carry all derivative instruments in
the statement of financial position at fair value. The Company must adopt
Statement 133 by January 1, 2000, however, early adoption is permitted. Upon
adoption, the provisions of Statement 133 must be applied prospectively. The
Company anticipates that the adoption of
-9-
<PAGE>
FIRST OAK BROOK BANCHARES, INC. AND SUBSIDIARY
Statement 133 will not have a material impact on the Company's financial
statements.
On January 1, 1998, the Company adopted the Financial Accounting Standards
Board's Statement 130, "Reporting Comprehensive Income." Statement 130
established new rules for the reporting and display of comprehensive income
and its components; however, the adoption of the Statement had no impact on
the Company's net income or shareholders' equity. Statement 130 requires
unrealized gains or losses on the Company's available-for-sale securities,
which prior to adoption were reported separately in shareholders' equity, to
be included in other comprehensive income. Prior year financial statements
have been reclassified to conform to the requirements of Statement 130.
During the three and nine month periods ended September 30, total
comprehensive income amounted to $3,813,000 and $7,937,000, respectively, in
1998 and $3,431,000 and $12,658,000, respectively, in 1997. These amounts
represent the sum of net income for the period and the change in the
accumulated other comprehensive income.
3. Commitments and Contingent Liabilities:
In the normal course of business, there are various outstanding commitments
and contingent liabilities, including commitments to extend credit, which
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; therefore, the
amounts stated below do not necessarily represent future cash commitments.
These commitments are subject to the same credit policy as followed for
loans recorded in the financial statements.
The summary of these commitments to extend credit follows (in thousands):
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Commercial $74,219 $46,831
Commercial mortgage 46,195 37,834
Home equity 88,905 80,338
Check credit 893 969
</TABLE>
4. Shareholders' Equity:
On July 21, 1998 the Board declared a 100% stock dividend on Common and
Class A common stock which was distributed on September 3, 1998 to
shareholders of record on August 20, 1998. All share and per share amounts
have been restated to reflect the stock split effected in the form of a
dividend.
-10-
<PAGE>
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
Shares authorized, issued and outstanding are as follows:
September 30, December 31,
1998 1997
---- ----
Preferred Stock, Series B,
no par value:
Authorized 100,000 100,000
Issued None None
Outstanding None None
Class A Common Stock,
$2.00 par value:
Authorized 10,000,000 4,000,000
Issued 4,019,272 3,972,814
Outstanding 3,688,772 3,736,814
Common Stock,
$2.00 par value:
Authorized 6,000,000 3,000,000
Issued 3,263,984 3,297,792
Outstanding 2,915,938 2,949,746
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 $3.16
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.
On October 20, 1998 the Board declared an increase in the quarterly cash
dividend. The Class A Common new quarterly dividend is $.10 per share, up
11% from the October 1998 quarterly dividend of $.09. The Common new
quarterly dividend is $.0825 per share, up 10% from the October 1998
quarterly dividend of $.075. The dividends are payable January 22, 1999 to
shareholders of record on January 11, 1999.
5. Earnings per Share:
On December 31, 1997, the Company adopted the Financial Accounting Standards
Board's Statement 128, "Earnings per Share." Statement 128 replaces the
presentation of primary earnings per share (EPS) with basic EPS and fully
diluted EPS with diluted EPS. Basic EPS is computed by dividing net income
by the weighted average number of common shares outstanding for the period.
Diluted EPS is computed by dividing net income by the weighted average
number of common shares and common equivalent shares outstanding for the
period. EPS calculations for the three and nine month periods ended
September 30, 1997 have been restated to
-11-
<PAGE>
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
reflect the adoption of Statement 128. Earnings per share calculations for
the three and nine month periods ended September 30, 1998 and 1997 have been
restated to give effect to the 100% stock dividend which was declared on
July 21, 1998.
The following table sets forth the weighted average shares used in the
denominator for basic and diluted earnings per share for the periods ended
September 30, 1998 and 1997:
Three Months Nine Months
Ended September 30 Ended September 30
1998 1997 1998 1997
----------------- ----------------
Denominator for
basic earnings per
share 6,632,127 6,560,401 6,666,533 6,573,276
Effect of diluted
securities:
Stock options issued
to employees and
directors 157,816 227,277 168,055 189,108
--------------------- ---------------------
Denominator for
diluted earnings
per share 6,789,943 6,787,678 6,834,588 6,762,384
===================== =====================
6. Restatement and Reclassification:
Certain amounts in the September 30, 1997 interim condensed consolidated
financial statements have been reclassified to conform to their 1998
presentation and restated to give effect to the 100% stock dividend which
was declared on July 21, 1998.
-12-
<PAGE>
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Earnings Highlights - Third Quarter Results
- -------------------
Net income for the third quarter of 1998 was $2,479,000 compared with $2,230,000
earned in the third quarter of 1997, an increase of $249,000 or 11%. Basic
earnings per share for the third quarter of 1998 were $.37 as compared to $.34
for 1997, while diluted earnings per share were $.37 for 1998 as compared to
$.33 for 1997.
Key performance indicators for the 1998 third quarter show a return on average
assets of 1.05% compared with 1.11% for the third quarter of 1997. For the third
quarter of 1998, the return on average shareholders' equity was 13.26% compared
with 13.36% for the same quarter of 1997.
Net interest income is the difference between interest earned on loans and
investments and interest paid on deposits and other interest-bearing
liabilities. Net interest income, on a tax-equivalent basis, increased
$1,083,000 or 16%. This increase is attributable to an 18% increase in average
earning assets, offset by a 2% decrease in the net interest margin. The net
interest margin for the third quarter of 1998 was 3.50% compared to 3.57% for
the same period last year. The compression in the net interest margin was the
result of competitive pricing of loans and deposits.
-13-
<PAGE>
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
Average balances and effective interest yields and rates on a tax equivalent
basis for the third quarters of 1998 and 1997 were as follows (dollars in
thousands):
<TABLE>
<CAPTION> 1998 1997
------------------- -------------------
Average Effective Average Effective
Balance Yield Balance Yield
------- ----- ------- -----
<S> <C> <C> <C> <C>
Federal funds sold $ 46,830 5.55% $ 7,917 5.57%
Interest-bearing
deposits with banks 11,226 6.86 10,174 7.16
Securities 289,259 6.91 332,721 6.29
Loans 531,484 7.79 392,081 8.29
-------- ---- -------- ----
Total earning assets/
yield 878,799 7.37 $742,893 7.35%
======== ==== ======== ====
Interest-bearing
deposits $567,378 4.85 $501,398 4.88%
Short-term debt 63,459 5.11 55,814 5.20
FHLB borrowings 56,000 5.81 12,826 5.76
-------- ---- -------- ----
Total interest-bearing
liabilities/cost of
funds $686,837 4.95% $570,038 4.93%
======== ==== ======== ====
Net interest margin 3.50% 3.57%
==== ====
Net interest spread 2.42% 2.42%
==== ====
</TABLE>
In comparison to the third quarter of 1997, average loans for the third quarter
of 1998 grew 36%, or $139.4 million due to increased marketing efforts. The
increase in average loans was led by indirect auto loans (up $58.2 million),
commercial loans (up $39.1 million), commercial real estate loans (up $22.4
million) and residential real estate loans (up $15.1 million).
The effective yield on securities increased 62 basis points due to additional
accretion income recorded on securities that were called in the third quarter of
1998.
Average interest-bearing liabilities increased $116.8 million or 20% as compared
to the third quarter of 1997 due primarily to increases in average Federal Home
Loan Bank borrowings and average time deposits. Average time deposits increased
$58.0 million in response to successful retail deposit promotions.
Based on management's review of the adequacy of the loan loss reserve, the
Company recorded a provision for loan losses of $90,000 for the third quarter of
1998 compared to no provision in 1997. This increase was mainly the result of
current loan growth, as the level of nonperforming loans continues to be low.
See Asset Quality Section.
-14-
<PAGE>
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
Total other income increased $336,000 or 20%. Service charges on deposit
accounts increased $152,000 primarily due to an increase in business account
analysis fees.
Merchant card processing fees increased $103,000 primarily due to several new
large volume merchants and continued marketing efforts. Merchant interchange
expense (in other operating expenses) also rose $85,000 as compared to the third
quarter of 1997.
Other operating income increased $69,000 primarily due to the introduction of
ATM surcharge fees and gains on mortgages sold into the secondary market.
Other expenses for the third quarter rose $972,000 compared to 1997. Salaries
and employee benefits rose $598,000 as compared to 1997 due to normal raises, a
highly competitive job market for new hires and increased requirements for staff
in the new Aurora and Glen Ellyn branches and other growing areas of the bank.
Occupancy and equipment expenses increased $166,000 primarily due to an upgrade
of the mainframe computer system and the new Aurora and Glen Ellyn branches.
Other operating expenses increased $121,000 primarily as the result of increased
merchant interchange fees.
Earnings Highlights - Nine Month Results
- -------------------
Net income for the nine months ended September 30, 1998 was $6,738,000, compared
with $11,569,000 earned in 1997, a decrease of $4,831,000. Basic earnings per
share for the first nine months of 1998 were $1.01 as compared to $1.76 earned
in 1997 while diluted earnings per share were $.99 in 1998 as compared to $1.71
in 1997.
Earnings, excluding nonrecurring items, for the first nine months of 1998
increased $447,000 or 7% as compared to earnings, excluding nonrecurring items,
for the same period in 1997.
Earnings, excluding nonrecurring items, in 1998 were reduced by the after-tax
gain on the sale of securities while earnings, excluding nonrecurring items, in
1997 were reduced by the gain on the sale of property, the gain on the sale of
the credit card portfolio and increased by the loss on securities sales.
Key performance indicators both before and after the non-recurring items for the
first nine months of 1998 and 1997 compare as follows (amounts in thousands
except earnings per share):
-15-
<PAGE>
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
1998 1997
(excluding (excluding
nonrecurring nonrecurring
1998 1997 items) items)
---- ---- ------ ------
Net income $ 6,738 $ 11,569 $ 6,686 $ 6,239
Earnings per share:
Basic $ 1.01 $ 1.76 $ 1.00 $ .95
Diluted $ .99 $ 1.71 $ .98 $ .92
Return on average
assets .99% 2.01% .98% 1.08%
Return on average
shareholders'
equity 12.29% 25.26% 12.16% 13.61%
On a tax equivalent basis, net interest income for the first nine months of 1998
totaled $21,571,000 as compared to $21,745,000 in 1997, a 1% decrease. This
decrease is due to a 19% increase in average earning assets offset by a 17%
decrease in the net interest margin to 3.42% in 1998 from 4.10% in 1997. The
compression of the net interest margin was the result of a change in the
composition of average earning assets due to the sale of the credit card
portfolio and, to a lesser extent, competitive pricing for loans and deposits.
-16-
<PAGE>
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
Average balances and effective interest yields and rates on a tax equivalent
basis for the first nine months of 1998 and 1997 were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
Average Effective Average Effective
Balance Yield Balance Yield
------- ----- ------- -----
<S> <C> <C> <C> <C>
Federal Funds sold $ 41,009 5.54% $ 10,086 5.40%
Interest-bearing
deposits with banks 11,217 6.79 3,639 7.11
Securities 297,234 6.57 283,920 6.41
Loans 494,368 7.96 411,799 8.96
-------- ---- -------- ----
Total earning assets/
yield $843,828 7.34% $709,444 7.88%
======== ==== ======== ====
Interest-bearing
deposits $545,513 4.92% $484,603 4.81%
Short-term debt 58,154 5.18 58,528 5.14
FHLB borrowings 55,674 5.80 8,132 5.72
-------- ---- -------- ----
Total interest-bearing
liabilities/cost of
funds $659,341 5.02% $551,263 4.86%
======== ==== ======== ====
Net interest margin 3.42% 4.10%
==== ====
Net interest spread 2.32% 3.01%
==== ====
</TABLE>
In comparison to the nine months ended September 30, 1997, average loans for the
nine month period ended September 30, 1998 grew 20%, or $82.6 million due to
increased marketing efforts. The increase in average loans was led by indirect
auto loans (up $56.3 million), commercial loans (up $23.8 million), commercial
real estate loans (up $20.7 million), and residential real estate loans (up
$10.9 million). These increases were partially offset by a decrease in average
credit card loans due to the sale of the portfolio ($35.7 million).
Loan growth since December 31, 1997 of $124.9 million was primarily due to
indirect auto (up $42.9 million), commercial loans (up $35.7 million),
commercial real estate (up $27.1 million) and residential real estate (up $15.9
million).
Average interest-bearing liabilities for the period increased $108.1 million or
20% as compared to the same period of 1997 due primarily to an increase in
average Federal Home Loan Bank borrowings of $47.5 million and an increase in
average time deposits of $62 million.
Based on management's review of the adequacy of the loan loss reserve, the
Company recorded a provision for loan losses of
-17-
<PAGE>
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
$240,000 for the nine months ended September 30, 1998 compared to $1,550,000 in
1997. This decrease was mainly the result of a special provision for loan losses
of $800,000 in 1997 related to the sale of the credit card portfolio as well as
low levels of nonperforming loans. See Asset Quality Section.
Total other income excluding the gain on the sale of the credit card portfolio
rose $1,433,000 or 32% over 1997. Service charges on deposit accounts increased
$362,000 primarily due to an increase in business account analysis fees.
Investment management and trust fees rose $20,000 primarily due to an increase
in discretionary assets under investment management and other new trust
business. Discretionary assets under investment increased to $190 million at
September 30, 1998 from $130 million at September 30, 1997.
Merchant card processing fees increased $260,000 primarily due to several new
large volume merchants and continued marketing efforts. Merchant interchange
expense (in other operating expenses) also rose $213,000 as compared to the same
period in 1997.
Other operating income increased $703,000 primarily due to an increase of
$450,000 in income earned from the revenue sharing agreement on the sold credit
card portfolio, the introduction of ATM surcharge fees and gains on mortgages
sold into the secondary market.
Total other expenses for the nine month period increased $1,517,000, or 10%.
Excluding the non-recurring gain on the sale of other real estate owned in 1997,
other expenses increased $1,002,000 as compared to 1997. Salaries and employee
benefits increased $1,246,000 due to normal raises, a highly competitive job
market for new hires and increased requirements for staff in the new Aurora and
Glen Ellyn branches and other growing areas of the bank. These additional
salaries were offset by the elimination of salaries due to the sale of the
credit card portfolio.
Occupancy and equipment expenses for the first nine months of 1998 increased
$267,000 primarily due to an upgrade to the mainframe computer system and the
new Aurora and Glen Ellyn branches.
Data processing costs decreased $496,000 and advertising costs decreased
$164,000, primarily as a result of the sale of the credit card portfolio.
Other operating expenses increased $11,000 primarily as a result of an increase
in merchant interchange expense, offset by reduced expenses due to the sale of
the credit card portfolio.
-18-
<PAGE>
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
Asset Quality
- -------------
Asset quality remains very strong, with nonperforming assets (nonaccrual loans,
renegotiated loans, loans past due 90 days or more and still accruing, and other
real estate owned) totaling $664,000 at September 30, 1998. There was no other
real estate owned as of September 30, 1998.
Net charge-offs for the first nine months of 1998 totaled $525,000 a decrease
from net charge-offs of $1,126,000 for the same period of 1997. Of total net
charge-offs in 1998, $451,000 related to an overdraft. The Company's subsidiary
is vigorously pursuing recovery of this charge-off in a lawsuit filed in Federal
Court for the Northern District of Illinois. The suit names a commercial
customer and a major Loop bank as defendants. The complaint alleges the
commercial customer perpetrated an improper kiting scheme and a major Chicago
bank violated the requirements for the timely return of the subject checks
imposed on it by law and regulations. Currently the case is in a discovery
phase.
At September 30, 1998 the Company's loan loss reserve totaled $4,044,000, or
.71%, of loans outstanding. Management believes the loan loss reserve is at an
adequate level commensurate with the risks inherent in the loan portfolio.
The following table summarizes the Company's nonperforming assets
(in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Nonaccrual $ -- $ --
Loans which are past due
90 days or more 664 378
------- -------
Total nonperforming loans 664 378
Other real estate owned -- --
------- -------
Total nonperforming assets $ 664 $ 378
======= =======
Nonperforming loans to loans
outstanding .11% .09%
Nonperforming assets to loans
outstanding and other real
estate owned .11% .09%
Allowance for loan losses to
nonperforming loans 6.09x 11.45x
Allowance for loan losses to
loans outstanding .71% .97%
Net charge-offs to average
loans outstanding (annualized) .11% .36%
</TABLE>
Loans past due 90 days or more and still accruing interest as of September 30,
1998 included two commercial loans with an aggregate balance of $480,000.
Payments on these loans were received on October 2, 1998, curing the
delinquencies.
-19-
<PAGE>
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
Capital
- -------
Shareholders' equity remains strong at $76.0 million at September 30, 1998. The
Company and its subsidiary bank's Tier 1, total risk-based capital and leveraged
ratios are in excess of minimum regulatory guidelines and also exceed the FDIC
criteria for "well capitalized" banks. The following table shows the capital
ratios of the Company and its subsidiary bank as of September 30, 1998 and the
minimum ratios for "well capitalized" banks. The Federal regulators exclude the
after-tax unrealized gain/loss on securities available for sale from these
ratios.
Well Company Oak Brook
Capitalized Consolidated Bank
----------- ------------ ----
Tier 1 greater than
Risk-based or equal to 6% 11.38% 10.40%
Total Capital
Ratio greater than
or equal to 10% 12.01% 11.03%
Tier 1 Capital greater than
leverage or equal to 5% 7.65% 6.99%
On January 28, 1997, the Company's Board of Directors authorized a stock
repurchase program allowing the Company to repurchase up to 4%, or approximately
270,000 shares, of its Class A or common stock through mid-1998. This repurchase
plan was completed during the second quarter of 1998.
On January 27, 1998, the Board of Directors authorized another stock repurchase
program. This program allows the Company to repurchase up to an additional
200,000 shares of its Class A common stock over the following 18 months.
Repurchases are being made in the open market or through negotiated transactions
from time to time depending on market conditions. The repurchased stock is held
as treasury stock to be used for general corporate purposes. As of September 30,
1998, approximately 136,000 shares of stock remain to be purchased under this
repurchase plan.
Liquidity
- ---------
Effective management of balance sheet liquidity is necessary to fund growth in
earning assets and to pay liability maturities, depository customers' withdrawal
requirements and shareholders' dividends.
The Company has numerous sources of liquidity including a significant portfolio
of shorter term assets, readily marketable investment securities, its deposit
base, and access to borrowing
-20-
<PAGE>
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
arrangements. Available borrowing arrangements are summarized as follows:
Oak Brook Bank:
. Informal Federal funds lines with six correspondent banks, subject to
continued good financial standing.
. Reverse repurchase agreement lines with three brokerage firms, subject to
the availability of collateral and continued good financial standing.
. Additional advances from the Federal Home Loan Bank of Chicago, subject to
the availability of collateral and FHLB stock ownership.
Parent Company:
. Revolving credit arrangement for $5 million. The line is currently unused
and matures on May 1, 1999. It is anticipated to be renewed annually.
. The parent company also had cash, short-term investments, and other
readily marketable securities totaling $7,500,000 at September 30, 1998.
Year 2000 Compliance
- --------------------
The Company is implementing the final phases of its Year 2000 Project Plan (the
"Plan"). The Company has completed the Awareness and Planning and Assessment
Phases of its Plan which encompassed all of its computer hardware and software
and physical plant equipment (the "Systems"). The Company continues to monitor
its vendors' and customers' progress on their Year 2000 compliance. The Company
is currently testing its Systems and all testing should be completed in the
first half of 1999. The Company's core data processing system is the Jack Henry
Silverlake System. The Company has received written assurances from Jack Henry
that a current release is Year 2000 compliant. The Company has scheduled the
installation of this release during November 1998 and has made arrangements to
test the System offsite during February 1999. This offsite testing of the Jack
Henry System will also include the testing of the Company's teller platform and
ACH systems due to their interface with Jack Henry. Testing of the Company's
security systems and Fedline should be completed by the end of 1998.
In addition to its final testing phase, the Company is in the process of
developing contingency plans for the failure of any critical system.
-21-
<PAGE>
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
The Company's estimate of out of pocket costs for testing is under $100,000.
These costs do not include the number of man-hours necessary to assess, test and
certify that its Systems are Year 2000 compliant. This cost also does not
include replacement of any system determined to be noncompliant during the
Testing Phase. The Company does not anticipate that these costs will be material
to its operations or financial condition. The Company will continue to expense
costs for Year 2000 compliance as they occur, consistent with generally accepted
accounting principles.
Branch Expansion
- ----------------
The Company's strategy is to invest in future growth through branch expansion in
Chicago's western suburbs. This form of growth requires a significant investment
in non-earning assets during the construction phase. Upon completion, for a
time, expenses exceed the income of the branch. While new branches retard
short-term earnings, we believe our market warrants judicious office additions.
In early January, 1998, the Company opened a new branch in Aurora, Illinois.
Operations of the Aurora branch through September 30, 1998 had a net after-tax
cost of approximately $.02 per basic and diluted share.
In September, 1998, the Company opened a new branch in Glen Ellyn, Illinois.
Costs incurred on the Glen Ellyn branch were being capitalized during the
construction phase. The Company will bear more expenses, including depreciation,
now that the branch has been put into service.
In June, 1998, the Company entered into a contract, subject to certain
conditions, to purchase a site for a branch in LaGrange, Illinois. This branch
is expected to open in 1999. Costs incurred for the LaGrange branch have been
capitalized. The Company will begin to incur more expenses, including
depreciation, when the branch is put into service.
Qualitative and Quantitative Disclosures about Market Risk
- ----------------------------------------------------------
As described in the 1997 Annual Report to shareholders, the Company manages its
interest rate risk through measurement techniques which include a simulation
model and gap analysis. As part of the risk management process, asset liability
management policies are established and monitored by management. The policy
objective is to limit the change in annual net interest income to 10% from an
immediate and sustained parallel change in interest rates of 200 basis points.
Based on the Company's most recent evaluation, management does not believe the
Company's risk position at September 30, 1998 has changed materially from that
at December 31, 1997.
-22-
<PAGE>
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
Forward Looking
- ---------------
Except for historical matters, this report contains certain forward looking
statements consisting of estimates with respect to the financial condition,
results of operations and business of the Company that are subject to various
factors and uncertainties which could cause actual results to differ materially
from these estimates. These factors include, but are not limited to:
deterioration of general economic conditions, changes in interest rates that
result in reduced interest rate margins, legislative or regulatory changes, loan
demand and depositor preferences, significant increases in competitive pressures
among financial institutions, and the ability of vendors and third parties to
respond to and meet commitments related to Year 2000 issues. These risks and
uncertainties should be considered in evaluating forward-looking statements.
ITEM 5. OTHER INFORMATION
The following is notice pursuant to Rule 14a-5(e)(2) and Rule 14a-4(c)(1) under
the Securities Exchange Act of 1934, as amended, regarding the Company's use of
discretionary authority with respect to non-Rule 14a-8 stockholder proposals
which may be made at the 1999 Annual Meeting of Stockholders (the "1999 Annual
Meeting").
In the event that a proponent of a stockholder proposal at the 1999 Annual
Meeting fails to provide notice of the intent to make such proposal by personal
delivery or mail to the Secretary of the Company on or before February 16, 1999
(or by an earlier or later date, if such date is established by amendment to the
Company's By-laws), then any proxy solicited by management may confer
discretionary authority to vote on such proposal.
The foregoing does not apply to proposals submitted for inclusion in the
Company's proxy statement for the 1999 Annual Meeting. As stated more fully in
the Company's proxy statement for its 1998 Annual Meeting of Stockholders,
notice of any such proposals must be received by personal delivery or by mail to
the Secretary of the Company no later than December 1, 1998.
-23-
<PAGE>
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit (27) Financial Data Schedule
B. Reports on Form 8-K
None
-24-
<PAGE>
FIRST OAK BROOK BANCSHARES, INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST OAK BROOK BANCSHARES, INC.
-------------------------------
(Registrant)
Date November 12, 1998 /s/ RICHARD M. RIESER, JR.
------------------- -------------------------------
Richard M. Rieser, Jr.,
President, Assistant
Secretary, and Director
Date November 12, 1998 /s/ ROSEMARIE BOUMAN
------------------- -------------------------------
Rosemarie Bouman,
Vice President, Chief
Financial Officer and
Chief Accounting Officer
-25-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from SEC Form
10-Q and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 35,160 33,494
<INT-BEARING-DEPOSITS> 11,290 10,072
<FED-FUNDS-SOLD> 35,615 17,000
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 154,310 167,919
<INVESTMENTS-CARRYING> 127,545 152,945
<INVESTMENTS-MARKET> 131,145 155,166
<LOANS> 572,251 413,444
<ALLOWANCE> 4,044 4,533
<TOTAL-ASSETS> 961,947 816,821
<DEPOSITS> 746,724 648,755
<SHORT-TERM> 73,988 70,097
<LIABILITIES-OTHER> 9,269 14,353
<LONG-TERM> 56,000 15,000
0 0
0 0
<COMMON> 14,567 14,326
<OTHER-SE> 61,399 54,290
<TOTAL-LIABILITIES-AND-EQUITY> 961,947 816,821
<INTEREST-LOAN> 29,336 27,478
<INTEREST-INVEST> 13,826 12,845
<INTEREST-OTHER> 2,270 600
<INTEREST-TOTAL> 45,432 40,923
<INTEREST-DEPOSIT> 20,062 17,445
<INTEREST-EXPENSE> 24,730 20,045
<INTEREST-INCOME-NET> 20,702 20,878
<LOAN-LOSSES> 240 1,550
<SECURITIES-GAINS> 79 (9)
<EXPENSE-OTHER> 16,911 15,394
<INCOME-PRETAX> 9,496 17,563
<INCOME-PRE-EXTRAORDINARY> 9,496 17,563
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,738 11,569
<EPS-PRIMARY> 1.01 1.76
<EPS-DILUTED> .99 1.71
<YIELD-ACTUAL> 2.32 3.01
<LOANS-NON> 0 0
<LOANS-PAST> 664 308
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 4,329 4,109
<CHARGE-OFFS> 707 1,261
<RECOVERIES> 183 135
<ALLOWANCE-CLOSE> 4,044 4,533
<ALLOWANCE-DOMESTIC> 4,044 4,533
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
