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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, 1998
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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 60523
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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 19, 1999 was: $82,145,467 based upon the last sales
price of the registrant's Class A Common stock at $18.25 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 19, 1999: 2,933,583 shares of Common Stock and 3,675,583
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, 1998, and Proxy Statement
for its 1999 Annual Meeting of Shareholders to be filed on or about April 1,
1999 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 1998 Annual Report to Shareholders or in the Proxy
Statement used in connection with the 1999 Annual Meeting of
Shareholders to be held on May 4, 1999. The following Cross-Reference
Index shows the page location in the 1998 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 1998 Annual
Report or the Proxy Statement are not required in Form 10-K and should
not be considered a part thereof.
<TABLE>
<CAPTION>
1998 1998 1999
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........................ 14-30
2. Properties................................................................. 11-12
3. Legal Proceedings.......................................................... 12
4. Submission of Matters to a Vote of Security Holders........................ 12
Part II
5. Market for Registrant's Common Equity
and Related Stockholder Matters......................................... 13
6. Selected Financial Data.................................................... 14
7. Management's Discussion and Analysis of
Financial Condition and Results of Operation............................ 14-30
7a. Quantitative and Qualitative Disclosures about
Market Risk............................................................. 24
8. Financial Statements and Supplementary Data................................ 31-48
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................................... 13
Part III
10. Directors and Executive Officers of the Registrant......................... 6-7
11. Executive Compensation..................................................... 10-13
12. Security Ownership of Certain Beneficial
Owners and Management................................................... 3-4
13. Certain Relationships and Related Transactions............................. 7
Part IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K................................................. 15-17
Signatures................................................................. 18
</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 nine locations in DuPage County and two locations
in Cook County. Another branch is scheduled to open in LaGrange, Illinois in the
third quarter of 1999. The Company employs 293 full-time equivalent employees.
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 10,000,000 and 6,000,000, respectively.
On July 21, 1998, the Company's 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
reflect this stock split effected in the form of a dividend.
As of December 31, 1998, the Company had total assets of $1,009,275,000; loans
of $631,987,000 deposits of $777,802,000, and shareholders' equity of
$77,061,000.
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 banking policy and
strategic planning. 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 and
foreign currency sales. The Bank has a full service investment management and
trust department.
The Bank originates the following types of loans: commercial, real estate (land
acquisition and construction, commercial mortgages, residential mortgages and
home equity lines), indirect auto and consumer loans. The extension of credit
inherently involves certain levels and types of risk (general economic
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conditions, industry and concentration risk, interest rate risk, and credit and
default risk) which the Company manages through the establishment of lending,
credit and asset/liability management policies and procedures.
Loans originated comply with the Bank's loan policies and governmental rules,
regulations and laws. While the 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 senior lending officer and/or bank loan committee is required. The
loan policy also 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 commercial
loans; commercial real estate, construction and land acquisition loans;
residential real estate, including purchase money, refinance and home equity
loans; indirect auto loans; and consumer loans, including direct auto loans,
check credit and student loans. These loans 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 and commercial real estate loans are structured specifically
for each loan.
3
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<TABLE>
<CAPTION>
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LOAN TYPE
YEAR END BAL. PRINCIPAL SIGNIFICANT MAJOR
(000'S) CREDIT LOAN ORIGINATION UNDERWRITING
% OF GROSS LOANS RISKS DOCUMENTATION STANDARDS LIEN POSITION
====================================================================================================================================
<S> <C> <C> <C> <C>
Commercial Borrower default Personal financial statements of Determination of eligible and Unsecured:
- -Working capital Industry change guarantors ineligible receivables Companies with
- -Term General economic Personal tax returns of guarantors Advances generally not to exceed significant net
conditions Business financial statements, or tax 80% of eligible collateral worth relative
BALANCE $108,685 returns (if applicable) Annual credit review to debt and
% 17.2% Cash flow projections Debt to tangible net worth normally solid
Credit history less than 4 to 1 operating
Mercantile reports Assessment of company's cash flow history
Supplier references -net annual cash flow should be Secured:
Customer references 120% of the total estimated Blanket first
If applicable annual debt service (with a lien on key
-Collateral valuation floor) 100% floor) business
-Accounts receivable and accounts Maximum length of term loans assets
payable listing and aging generally 7 years (unmonitored
-Machinery, furniture, fixtures and Personal guaranties of controlling or with
equipment, inventory lists owners of smaller closely held limited
-Pre-loan audit companies (full or partial) monitoring)
Periodic monitoring of accounts Secured:
receivable Specific
Periodic audit for asset based first lien on
loans assets being
Loan covenant restrictions financed
-Other borrowings (including
-Payment of dividends leases)
-Limit on owner withdrawals
-Sale of company
-Capital expenditures
-Debt to net worth limits
-Minimum tangible net worth
Evidence of insurance
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COMMERCIAL Borrower default Personal financial statements of Loans to appraised value generally Secured:
REAL ESTATE Industry change guarantors not to exceed 80% (with a ceiling First
General economic Personal tax returns of guarantors of 85%) mortgages
BALANCE $114,373 conditions Business financial statements, or tax Assessment of property's cash flow Assignment
% 18.1% returns (if applicable) -net annual cash flow should be of rents/
Cash flow projections 120% of the total estimated leases
Credit history annual debt service (with a 100% Security
Lender references floor) agreement on
Appraisals Personal guaranties of controlling fixtures
Environmental assessments owners (full or partial) Environmental
Credit history of key tenants Evidence of insurance indemnity
Financial information on key tenants Tax and insurance escrows (if agreement
Review of leases applicable)
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 LIEN
% OF GROSS LOANS RISKS DOCUMENTATION STANDARDS POSITION
====================================================================================================================================
<S> <C> <C> <C> <C>
Construction Project Personal financial statements of Land acquisition loan to value Secured:
and Land completion guarantors generally not to exceed 50% (with First
Acquisition Borrower default Personal tax returns of guarantors a ceiling of 65%) mortgages
Industry change Business financial statements or tax Land development loan to value Assignment
BALANCE $ 41,640 returns (if applicable) generally not to exceed 75% of rents/
% 6.6% Cash flow projections Construction loan to value generally leases
Credit history not to exceed 75% (with a ceiling Assignment of
Industry experience and reputation of 85%) of retail value unit sale
Contractor references Assessment of project cash flow contracts
Lender references Disbursement escrows Assignment of
Market trends and conditions Personal guaranties (full or partial) plans,
Project feasibility Evidence of insurance specifications
-Market acceptance Inspection construction
-Project marketing strategy and service
-Engineering review Residential subdivision projects contracts
Appraisals -Minimum unit release Assignment of
Environmental assessments requirements for accelerated developers
payback rights
Review of other current projects by -Interest reserves (if applicable) Environmental
developer indemnity
agreement
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RESIDENTIAL Borrower default Application (including financials) Debt to income generally not to Secured:
REAL ESTATE -Reduction of Verification of employment and income exceed 39% gross annual income -First
income Verification of deposits (excluding Principal/interest/taxes/insurance mortgages
-Excessive debt home equity) generally less than 28% of gross
BALANCE $117,438 -Future death, Collateral appraisal, generally two annual income
% 18.6% disability or appraisals for property values in Loan to value
divorce excess of $500,000 -Generally not to exceed 80% for
Decline in market Credit history loans under $500,000
value Flood hazard certification -Generally not to exceed 70%
Completion of for loans greater than $500,000
construction Insurance (flood, hazard)
Two year job history or employment
in related field
No serious prior derogatory credit
history
No current delinquencies
Secondary market loans (in addition
to above):
-Loan to value generally not to
exceed 95%
-Loan to values which exceed 80%
require private mortgage insurance
-Investor approval
HOME EQUITY
BALANCE $73,149 Same as above Same as above Same as above -Primarily
% 11.5% Second
mortgages
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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 GROSS LOANS RISKS DOCUMENTATION STANDARDS
====================================================================================================================================
<S> <C> <C> <C>
Indirect Auto Borrower default Application (with financials) Debt to income ratio generally not to
-Reduction of Verification of employment exceed 39% of gross annual
BALANCE $165,341 income Credit history income
% 26.1% -Excessive debt Evidence of insurance No serious prior derogatory credit
-Future death, history
disability or No current delinquencies
divorce Stable employment and residence
Collateral value Established credit, unless down
decline payment * 25%
Casualty
Dealer New dealerships are submitted for New cars-
-Business decline credit approval -invoice up to $18,000, will
-Industry decline -Review dealers trade and references finance up to $500 over invoice
-General -Review dealer financial statements -invoice over $18,000, will finance
economic -Mercantile report up to $1,000 over invoice
conditions -Annual review Used cars (generally not older than
-Fraud -Signed dealer agreement 4 years)-loans limited to 100% of
NADA loan value
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CONSUMER Borrower default Application (with financials) Debt to income ratio generally not to
AUTO (DIRECT) -Reduction of Verification of employment exceed 39% of gross annual
income Credit history income
BALANCE $ 3,386 -Excessive debt Evidence of insurance No serious prior derogatory credit
% .5% -Future death, history
disability or No current delinquencies
divorce Stable employment and residence
Collateral value Established credit, unless down
decline payment * 25%
Casualty
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 value
STUDENT Loss of Application Compliance with government
Government standards
BALANCE $ 5,803 guaranty
% .9%
OTHER
Various Various Various
BALANCE $ 2,804
% .5%
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<CAPTION>
===============================================================
LOAN TYPE
YEAR END BAL.
(000'S)
% OF GROSS LOANS LIEN POSITION
===============================================================
<S> <C>
Indirect Auto Secured, recorded lien
on title
BALANCE $165,341 Single interest
% 26.1% insurance
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CONSUMER Secured, recorded lien
AUTO (DIRECT) on title
Single interest
BALANCE $ 3,386 insurance
% .5%
STUDENT Unsecured,
Government guaranty
BALANCE $ 5,803
% .9%
OTHER
Various
BALANCE $ 2,804
% .5%
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</TABLE>
* Greater than
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Competition
- -----------
The Company and its subsidiary bank operate primarily in DuPage County,
Illinois, with nine 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, 1998, the Company's eight DuPage County, Illinois, offices (Glen
Ellyn was not opened until September 1998) held $656.9 million in deposits for
an approximate 5.8% market share in relation to the total deposits in DuPage
County commercial banks. The Company's two offices in Cook County, Illinois,
contained $85.5 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, 1998, had $111.5 billion in deposits.
The Company's subsidiary bank is located in a highly competitive market facing
competition for deposits, loans and other financial services from many financial
intermediaries, including banks, 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
- -------
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 Federal Deposit
Insurance Corporation 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 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
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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, 1998 the Company's Tier 1,
total risk-based capital and leverage ratios were in excess of minimum
regulatory guidelines and the subsidiary bank's capital ratios also exceed the
FDIC criteria for "well capitalized" banks. See the Company's Annual Report at
page 43 for a more detailed discussion of the Risk Based Assessment System and
the impact upon the Company and its subsidiary bank.
Federal Deposit Insurance
- -------------------------
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, 1999 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:
BIF RATES
<TABLE>
<CAPTION>
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Capital Supervisory Subgroup
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Group A B C
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<S> <C> <C> <C>
Well capitalized 0 cents 3 cents 10 cents
Adequate 3 10 24
Under capitalized 17 24 27
</TABLE>
The Funds Act also authorized the Financing Corporation (FICO) to levy annual
assessments of BIF-assessable deposits to service FICO bond obligations. On
January 4, 1999 the Company's subsidiary bank was assessed $44,253 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, 1998 call reports and for BIF institutions the
rate was 1.22c 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.
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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.
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 to
allow responsible agencies to 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 are 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 allows these transactions.
Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA")
- ------------------------------------------------------------------------------
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, 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.
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
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capital position of the institution. See the Company's Annual Report pages 29
and 43 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,
executive compensation and market risk sensitivity.
Year 2000
- ---------
See "Year 2000 Compliance" on pages 29 & 30, inclusive, of the Company's 1998
Annual Report to Shareholders, which is Incorporated herein by reference.
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.
10
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Statistical Disclosure by Bank Holding Companies
- ------------------------------------------------
See "Management Discussion and Analysis" on pages 14 through 30, inclusive, of
the Company's 1998 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 5 of the Notes
to Consolidated Financial Statements and lease exhibits previously filed and
incorporated by reference.
The Company and Oak Brook Bank occupy space in an eight-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 from Oak Brook Bank. A
portion of the third floor is rented to third parties.
During 1998, Oak Brook Bank purchased property in the western Cook County suburb
of LaGrange, Illinois. Development of the site began in 1999 for the
construction of a new branch expected to open during the third quarter of 1999.
The brick building will be approximately 4,100 square feet.
In addition, Oak Brook Bank operates the following branches:
Addison - A 26 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 originally the
-----
Heritage Bank of Addison, acquired September, 1974.
Aurora - A one year old Federalist style building, 4,400 square feet, brick
------
with a slate roof and accentuated by a clock tower in Aurora, Illinois.
This facility and real estate are owned by Oak Brook Bank. Opened in
-----
January, 1999.
Bensenville - Approximately 2,000 square feet of leased space in a modern,
----------- ------
two-story glass building in Bensenville, Illinois. The current lease
expires in 2001 and has three additional 5-year renewal options. Opened in
May, 1986.
Broadview - A 45 year old, 6,955 square foot, one-story brick building in
---------
Broadview, Illinois. This facility and real estate are owned by Oak Brook
-----
Bank. Originally Liberty Bank acquired in March, 1989.
Broadview Drive-up - Oak Brook Bank also owns a detached one-story drive-up
------------------ ----
facility across the street from the Broadview location.
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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. The current lease expires in 1999 and has
five additional 3-year renewal options. Opened in October, 1988.
Glen Ellyn - A new cape cod cottage style building, 1,100 square feet and
----------
constructed of stone and stucco. The facility includes a drive-up and is
owned by Oak Brook Bank. Opened in September, 1998.
-----
Glenview - Approximately 1,800 square feet of leased space in a strip
-------- ------
shopping center in Glenview, Illinois. The current lease expires in 2002
with an option to cancel in 1999. Opened in March, 1990.
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. The current lease expires in 2000 and has one additional 3-year
renewal option. 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. The current lease expires in
2003. Originally Warrenville Bank & Trust, acquired April, 1983.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiary bank were not subject to any material pending or
threatened legal actions as of December 31, 1998. 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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock is listed on The Nasdaq Stock Market(R). See
"Stock Performance and Dividend Information" on page 1 and "Corporate and
Shareholder Information" on the inside back cover of the Company's 1998 Annual
Report to Shareholders which is incorporated herein by reference.
See Notes 8, 12 and 13 of the Notes to Consolidated Financial Statements on
pages 42 through 45, inclusive, of the Company's 1998 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 14 of
the Company's 1998 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 "Management Discussion and Analysis" on pages 14 through 30, inclusive, of
the Company's 1998 Annual Report to Shareholders, which is incorporated herein
by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
See "Interest Rate Sensitivity" on page 24 of the Company's 1998 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 31 through
48, inclusive, of the Company's 1998 Annual Report to Shareholders, which is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable. Information relating to this Item was previously reported on the
Company's Form 8-K filed on July 28, 1998.
13
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Directors and Executive Officers" on pages 6 and 7 of the Company's Proxy
Statement to be filed on or before April 1, 1999, 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 10 through 13, inclusive, of the Company's
Proxy Statement to be filed on or before April 1, 1999, 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 3 and 4 of the Company's Proxy Statement to be filed on or
before April 1, 1999, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Certain Transactions" on page 7 of the Company's Proxy Statement to be
filed on or before April 1, 1999, which is incorporated herein by reference.
14
<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 31
Consolidated Balance Sheets - December 31, 1998
and 1997 32
Consolidated Statements of Income for each of
the three years in the period ended
December 31, 1998 33
Consolidated Statements of Changes in
Shareholders' Equity for each of the three
years in the period ended December 31, 1998 34
Consolidated Statements of Cash Flows for each
of the three years in the period ended
December 31, 1998 35
Notes to Consolidated Financial Statements 36-48
2. Financial statement schedules: Other than the opinion of the
predecessor independent auditor, filed as Exhibit 99
hereto, 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-Q Quarterly Report for the
period ended June 30, 1998, incorporated herein by
reference).
Exhibit (10.1) Loan Agreement between First Oak Brook Bancshares, Inc.
and LaSalle National Bank dated December 1, 1991 as
amended. (Exhibit 10.1 to the Company's Form 10-Q
Quarterly Report for the period ended June 30, 1998,
incorporated herein by reference).
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).
15
<PAGE>
Exhibit (10.3) First Oak Brook Bancshares, Inc. Executive Deferred
Compensation Plan effective November 1, 1997. (Exhibit
10.3 to the Company's Form 10-K Annual Report for the
year ended December 31, 1997, incorporated herein by
reference).
Exhibit (10.4) 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).
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).
16
<PAGE>
Exhibit (10.9) Form of Transitional Employment Agreement for Eugene P.
Heytow, Richard M. Rieser, Jr. and Frank M. Paris.
Exhibit (10.10) Form of Transitional Employment Agreement for Senior
Officers.
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).
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 effective May 7, 1996. (Exhibit
10.15 to the Company's Form 10-K Annual Report for the
year ended December 31, 1996, incorporated herein by
reference).
Exhibit (13) Annual Report to Shareholders.
Exhibit (21) Subsidiary of the Registrant.
Exhibit (23.1) Consent of KPMG LLP.
Exhibit (23.2) Consent of Ernst and Young LLP.
Exhibit (27) Financial Data Schedule.
Exhibit (99) Ernst & Young LLP Opinion.
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.
17
<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 19, 1999
--------------------
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/S/ EUGENE P. HEYTOW Chairman of the Board March 19, 1999
- ----------------------------
Eugene P. Heytow and Chief Executive
Officer
/S/ FRANK M. PARIS Vice Chairman of March 19, 1999
- ----------------------------
Frank M. Paris the Board
/S/ RICHARD M. RIESER,Jr. President, March 19, 1999
- ----------------------------
Richard M. Rieser, Jr. Assistant Secretary,
and Director
/S/ MIRIAM LUTWAK FITZGERALD Director March 19, 1999
- ----------------------------
Miriam Lutwak Fitzgerald
/S/ GEOFFREY R. STONE Director March 19, 1999
- ---------------------------
Geoffrey R. Stone
/S/ MICHAEL L. STEIN Director March 19, 1999
- ---------------------------
Michael L. Stein
/S/ STUART I. GREENBAUM Director March 19, 1999
- ---------------------------
Stuart I. Greenbaum
/S/ ROBERT WROBEL Director March 19, 1999
- ---------------------------
Robert Wrobel
/S/ ROSEMARIE BOUMAN Vice President and March 19, 1999
- ---------------------------
Rosemarie Bouman Chief Financial Officer
</TABLE>
18
<PAGE>
EXHIBIT (10.9)
TRANSITIONAL EMPLOYMENT AGREEMENT
(EXECUTIVE OFFICER GROUP)
-------------------------
This Agreement is made as of this 26th day of January, 1999, by and between
First Oak Brook Bancshares, Inc., a Delaware corporation (the "Employer") and
the undersigned executive officer (the "Executive").
W I T N E S S E T H:
WHEREAS, the Executive has been employed for some years past by the
Employer and/or one or more of its subsidiaries; and
WHEREAS, the Employer wishes to assure both itself and the Executive of
continuity of management in the event of any actual Change in Control (as
defined in Paragraph 2) of the Employer on the terms and conditions set forth
herein; and
WHEREAS, the Executive desires to provide such services and continuity; and
WHEREAS, to achieve this purpose, the Board of Directors of the Employer
considered and approved this Agreement to be entered into with the Executive as
being in the best interests of the Employer and its stockholders;
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein, the parties hereto agree as follows:
1. Term This Agreement shall become effective upon the occurrence of a
----
Change in Control (as defined in Paragraph 2, below) (hereinafter called the
"Effective Date of this Agreement") and shall remain in effect for a term
continuing until the end of the thirty-sixth (36th) calendar month following the
month in which the Effective Date of this Agreement occurs; provided, however,
that, anything in this Agreement to the contrary notwithstanding, if a Change in
Control occurs and if the Executive's employment with the Employer was
terminated within six (6) months prior to the date on which the Change in
Control occurs, and if it is reasonably demonstrated by the Executive that such
termination of employment (a) was at the request of a third party who was taking
steps reasonably calculated to effect a Change in Control or (b) otherwise arose
in connection with or anticipation of a Change in Control, then for all purposes
of this Agreement the "Effective Date of this Agreement" shall mean the date
immediately prior to the date of such termination of employment.
<PAGE>
2. Change in Control. For the purposes of this Agreement, a "Change in
-----------------
Control" shall be deemed to have occurred if:
(a) Any "person" is or becomes the "beneficial owner" directly or
indirectly of securities of the Employer representing more than
fifty percent (50%) of the combined voting power of the
Employer's then outstanding securities entitled to vote generally
in the election of directors (the "Voting Stock"); or
(b) Continuing Directors cease for any reason to constitute at least
a majority of the entire Board of Directors of the Employer; or
(c) The consummation of a business combination involving the Employer
(or any direct or indirect subsidiary of the Employer) occurs,
unless after such a business combination (i) the shareholders of
the Employer immediately prior to the business combination
continue to own, directly or indirectly, more than fifty percent
(50%) of the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of
directors of the new (or continuing) entity immediately after the
business combination, and (ii) at least a majority of the members
of the board of directors of the entity resulting from the
business combination were Continuing Directors at the time of the
execution of the initial agreement, or of the action of the
Board, providing for such business combination; or
(d) A complete liquidation or dissolution of the Employer or
consummation of the sale or other disposition of all or
substantially all of the assets of the Company.
For purposes of foregoing, "person" and "beneficial owner" shall be as defined
in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended,
and the regulations thereunder. A Change in Control shall not be deemed to have
occurred under subparagraph (a) above, if the beneficial owner is a corporation
owned directly or indirectly by the shareholders of the Employer in
substantially the same proportions as their ownership of the Voting Stock, an
employee benefit plan of the Employer or any subsidiary of the Employer, or any
person who, as of January 26, 1999, is the beneficial owner of more than fifty
percent (50%) of the Voting Stock. For purposes of subparagraph (b), an
individual will be a "Continuing Director" if he or she is a director of the
Employer on January 26, 1999, or becomes a director of the Employer thereafter,
provided the individual was elected, or was nominated for an election to occur
at a meeting of stockholders, by a majority of the Continuing Directors still in
office; provided, however, that in no event shall an individual be considered a
Continuing Director if the individual was designated for election or nomination
by a person who has entered into an agreement with the Employer to effect an
acquisition described in subparagraph (a) or a business combination described in
subparagraph (c). For purposes of subparagraph (c), a business combination
shall mean a merger or consolidation, or
<PAGE>
an issuance of securities by the Employer in connection with a merger or
consolidation, involving the Employer (or any direct or indirect subsidiary of
the Employer).
3. Employment. The Employer hereby agrees to continue the Executive in
----------
its employ for a period of thirty-six (36) months commencing on the Effective
Date of this Agreement (the "Employment Period"), with the same director and
officer titles, duties and responsibilities as in effect immediately prior to
the Effective Date of this Agreement. The Executive agrees that during the
Employment Period he shall continue to devote such time to his executive duties
as devoted prior to the Effective Date of the Agreement and shall perform such
duties faithfully; provided, however, that Executive's continued service for
other corporations and entities, and on any other corporate, civic, charity or
foundation board shall not be deemed to breach Executive's obligations
hereunder.
4. Compensation, Compensation Plans, Benefits and Perquisites. During the
----------------------------------------------------------
Employment Period, the Executive shall:
(a) Receive an annual salary and director's fees at a rate which is
not less than his rate of annual salary and director's fees
immediately prior to the Effective Date of this Agreement, with
the opportunity for increases from time to time thereafter which
are in accordance with the regular practices of the Employer or
its affiliates (which for purposes of this Agreement, shall mean
any corporation or enterprise which, as of a given date, is a
member of the same controlled group of corporations, the same
group of trades or businesses under common control or the same
affiliated service group, determined in accordance with Section
414(b), (c), (m) or (o) of the Code (as defined in Paragraph 7
hereof), as is the Employer) with respect to executives with
comparable duties, provided, however, that the rate of such
annual salary (and director's fees) shall be increased by at
least four percent (4%) on each first day of January which occurs
during the Employment Period;
(b) Be eligible to participate on a comparable basis, in each
calendar year during which the Employment Period runs, in an
annual bonus program maintained by the Employer or its affiliates
in which executives with comparable duties are eligible to
participate, provided that the annual bonus payable thereunder
shall not be less than the average annual bonus paid to the
Executive during the three calendar years immediately preceding
the Effective Date of this Agreement;
(c) Be eligible to participate on a comparable basis in the stock
option or other equity incentive plans and any other bonus
incentive compensation plans maintained from time to time by the
Employer or its affiliates during the Employment Period and in
which executives with comparable duties are eligible to
participate;
(d) Be entitled to participate (i) in any group or executive medical,
dental, disability, life insurance, retirement, profit sharing,
thrift and other plans and programs, including nonqualified and
deferred compensation plans
<PAGE>
and programs, maintained from time to time by the Employer or its
affiliates during the Employment Period and in which executives
with comparable duties are eligible to participate and (ii) in
the Executive Medical Plan, split-dollar and other special life
insurance arrangements, and Stock Bonus Plan to the same extent
the Executive participated in such benefits before the Effective
Date of the Agreement; and
(e) Be entitled to receive vacation and perquisites which are
provided by the Employer or its affiliates from time to time
during the Employment Period to executives with comparable
duties, but in no event less favorable than the vacation and
perquisites to which he was entitled immediately prior to the
Effective Date of this Agreement (including, but not limited to,
company car and allowances, club memberships and dues,
subscriptions and travel).
5. Termination During Employment Period.
------------------------------------
(a) For purposes of this Agreement, the term "termination" shall mean
(i) termination by the Employer of the employment of the
Executive with the Employer and all of its affiliates for any
reason other than death, disability or "cause" (as defined
below), or (ii) resignation of the Executive for "constructive
discharge" (as defined below).
(b) The term "constructive discharge" shall mean the Executive's
resignation from the Employer and all of its affiliates upon any
one of the following:
(i) the failure of the Employer to pay or provide the
compensation, benefits and perquisites contemplated by
Paragraph 4, other than an isolated, insubstantial and
inadvertent failure which is remedied by the Employer
promptly after receipt of written notice thereof given by
Executive;
(ii) there shall have occurred a material diminution in the
Executive's title or duties and responsibilities from those
in effect prior to the Effective Date of this Agreement;
other than an isolated, insubstantial and inadvertent
failure which is remedied by the Employer promptly after
receipt of written notice thereof given by Executive;
(iii) the Employer changes the Executive's (A) primary employment
location to a place that is more than 35 miles from
Executive's primary employment location as of the Effective
Date of the Agreement and/or (B) regularly scheduled work
hours significantly from such hours as of the Effective
Date of the Agreement; and/or
(iv) at any time for any reason prior to the first anniversary
of the Effective Date of the Agreement.
<PAGE>
(c) The term "cause" means (i) felony conviction resulting from an
act or acts of dishonesty or breach of trust, other than a felony
predicated upon the Executive's vicarious liability or (ii) the
Executive's continued and willful failure to substantially
perform his duties under this Agreement. For purposes of this
paragraph, no act or failure to act on the Executive's part will
be considered "willful" unless done, or omitted to be done, by
him not in good faith and without reasonable belief that his
action or omission was in the interests of the Employer or its
affiliates or not opposed to the interests of the Employer or its
affiliates.
6. Termination Benefits. In the event of a termination of the Executive
--------------------
during the Employment Period, the Employer shall provide and the Executive shall
be entitled to receive the following:
(a) The Executive shall, notwithstanding such termination, be
entitled to continue to receive salary payments and director's
fees for thirty-six (36) months from the date of termination
(which thirty-six month period shall be treated hereunder as a
continuation of Employment Period) at the greater of (i) the rate
required by Paragraph 4(a), (ii) in effect immediately prior to
termination or the (iii) average annual salary received by the
Executive during the five (5) calendar years immediately
preceding the calendar year in which the Effective Date of this
Agreement occurs.
(b) The Executive shall receive a bonus payment with respect to each
calendar year ending during such thirty-six (36) month period
equal to the average annual cash bonus paid during the three
calendar years immediately preceding the Effective Date of the
Agreement, or if greater, the date of termination, plus a pro
---
rata payment for the calendar year in which such thirty-six (36)
----
month period ends based on such average annual cash bonus. The
bonus payments for each calendar year shall be made within 30
days of the end of the calendar year to which such bonus relates.
(c) The Employer shall maintain in full force and effect for the
continued benefit of the Executive and the Executive's dependents
and the group and executive medical and dental plans described in
Paragraph 4(d)(i) and (ii) to which Executive would have been
entitled if he had remained in the employ of the Employer through
the remainder of the Employment Period (as extended in Paragraph
6(a) above), or if such continuation is not possible under the
terms and provisions of such plans, programs, or arrangements,
the Employer shall arrange to provide benefits substantially
similar to those which the Executive (and, to the extent
applicable, his dependents) would have been entitled to receive
under such medical and dental plans if the Executive had remained
a participant in such plans, programs or arrangements for such
period.
<PAGE>
(d) Upon the expiration of the extended Employment Period, (i)
coverage under the Executive Medical Plan shall continue after
the extended Employment Period for the life of the Executive and
his spouse at no cost to such Executive or spouse, and (ii) the
Executive (and, if applicable, his dependents) shall be entitled
to maintain group medical and dental coverage under the
continuation coverage provisions of such plans ("COBRA
Coverage"), which entitlement shall, notwithstanding any other
provisions of the group plan to the contrary, be subject to
termination only in the event of the failure of the Executive or
the dependent to timely pay the appropriate premium for such
coverage, provided that such coverage shall be secondary to any
group coverage (including Medicare or any government-sponsored or
mandated program) subsequently obtained or covering the Executive
or dependent.
(e) The Employer shall pay to the Executive the value of the stock
options and other equity incentives which the Executive would
otherwise have received if he remained in the employ of the
Employer through the remainder of the Employment Period (as
extended in Paragraph 6(a) above). The "value" of such stock
options shall be equal to (i) the total number of shares subject
to option comprising the average of the annual option awards made
by the Employer or its affiliates during such remainder of the
Employment Period to individuals employed by the Employer or one
of its affiliates who received option awards and whose annual
base salary is not less than 90% nor more than 110% of the
applicable amount of the annual base salary and director's fee
payments described in Paragraph (6)(a) above (or, if there are no
individuals whose annual base salary falls with such range, then
those whose base salary is not less than 90% nor more than 110%
of the base salary of the individual whose base salary is next
highest above the annual amount described in Paragraph 6(a))
(such individuals within such range the "Comparable
Individuals"), multiplied by (ii) the value per option share,
determined at the time of grant using the Black-Scholes option
pricing model. The "value" of restricted stock or similar equity
incentive awards shall be the total number of shares covered by
the average of the other equity incentive awards made by the
Employer or its affiliates during the remainder of the Employment
Period to Comparable Individuals who received such awards,
multiplied by the value of the restricted stock or other equity
unit, determined based upon the fair market value of the
Employer's or affiliate's stock as of the date the grant is made
to the Comparable Individuals. Payments of the amounts described
in this Paragraph 6(c) shall be made on each anniversary of the
Executive's termination of employment, which payments shall equal
the aggregate value described above as determined by reference to
the stock options, restricted stock or other equity awards made
by the Employer or its affiliates in the preceding 12 months.
(f) The Employer shall pay to Executive the value of the Employer's
Employee's Savings Plan, Stock Bonus Plan, Executive Deferred
<PAGE>
Compensation Plan, and any other executive or group life
insurance, retirement, profit sharing, thrift and other plans and
programs, including nonqualified and deferred compensation plans,
described in Paragraph 4(d)(i) above, of the life insurance
premium reimbursement and any other split-dollar and other
special life insurance arrangements described in Paragraph
4(d)(ii) above, and of the perquisites described in Paragraph
4(e) above, which the Executive would otherwise have received if
Executive remained in the employ of the Employer through the
remainder of the Employment Period (as extended in Paragraph 6(a)
above). For purposes of this Paragraph 6(e) The annual "value" of
the employee benefit plans described in Paragraph 4(d)(i) and of
the life insurance [and Stock Bonus Plan make-ups] described in
Paragraph 4(d)(ii) shall be determined on the basis of the actual
rate of contributions payments or accruals, as applicable, during
the calendar year immediately preceding the Effective Date of
this Agreement (or, if the value as to any such amount as so
determined would be greater, during the calendar year immediately
preceding the date of termination) and an annual "value" of the
perquisites described in Paragraph 4(e) shall be 10.0% of the
annual amount of the salary and the director's fees payments
described in Paragraph 6(a) above. One-twelfth (1/12th) of the
aggregate annual value of the benefits described in Paragraph
4(d)(i) and 4(d)(ii) and the perquisites described in this
Paragraph 6(e) shall be paid to the Executive monthly for thirty-
six (36) months following the date of termination.
(g) From and after the date of a termination until full satisfaction
of the obligations of the Employer hereunder and under the plans,
programs and arrangements referred to herein and under any other
agreement with respect to which Employer may be obligated to make
post-employment payments to the Executive, the Employer shall
maintain a grantor trust in form and substance reasonably
acceptable to Executive to assist the Employer in the discharge
of its obligations hereunder and under any other nonqualified,
deferred compensation plan maintained by the Employer under which
Executive has an interest. The Employer shall deposit assets and
make contributions into the grantor trust in amounts necessary to
maintain the assets of the grantor trust at a level equal to the
present value of the obligations of the Employer to the Executive
under this Agreement and any such plans, programs or
arrangements. Such amounts due shall be paid from the grantor
trust or by the Employer directly, in which case the Employer
shall be entitled to reimbursement form the grantor trust.
7. Supplemental Compensation. In the event it shall be determined
-------------------------
that any payment or distribution of any type to or for the benefit of the
Executive by the Employer, any of its affiliates, or any person who acquires
ownership or effective control of the Employer or ownership of a substantial
portion of the Employer's assets (within the meaning of Section 280G of the
Code, and the regulations thereunder) or any affiliate of such person, whether
paid or payable or distributed or distributable pursuant to the terms of this
Agreement or
<PAGE>
otherwise (the "Total Payments"), is subject to the excise tax imposed by
Section 4999 of the Code or any similar successor provision or any interest or
penalties with respect to such excise tax (such excise tax, together with any
such interest and penalties, are collectively referred to as the "Excise Tax"),
then the Executive shall be entitled to receive an additional payment (a "Gross-
Up Payment") in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including any Excise Tax, imposed upon the Gross-Up Payment, the Executive
retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon
the Total Payments (not including any Gross-Up Payment). All determinations as
to whether any of the Total Payments are "parachute payments" (within the
meaning of Section 280G of the Code), whether a Gross-Up Payment is required,
the amount of such Gross-Up Payment and any amounts relevant to the foregoing
sentence shall be made by an independent accounting firm selected by the
Employer, which may be the accounting firm then regularly retained by the
Company (the "Accounting Firm"). The Accounting Firm shall provide its
determination (the "Determination"), together with detailed supporting
calculations, regarding the amount of any Gross-Up Payment and any other
relevant matter, both to the Employer and the Executive, within five (5) days of
a date of termination, if applicable, or such earlier time as is requested by
the Employer or the Executive (if the Executive reasonably believes that any of
the Total Payments may be subject to the Excise Tax). Any determination by the
Accounting Firm shall be binding upon the Employer and the Executive. As a
result of uncertainty in the application of Section 4999 of the Code at the time
of the initial determination by the Accounting Firm hereunder, it is possible
that the Employer should have made Gross-Up Payments ("Underpayment"), or that
Gross-Up Payments will have been made by the Employer which should not have been
made ("Overpayments"). In either such event, the Accounting Firm shall determine
the amount of the Underpayment or Overpayment that has occurred. In the case of
the Underpayment, the amount of such Underpayment shall be promptly paid by the
Employer to or for the benefit of the Executive. In the case of an Overpayment,
the Executive shall, at the direction and expense of the Employer, take such
steps as are reasonably necessary (including the filing of returns and claims
for refund), follow reasonable instructions from, and procedures established by,
the Employer, and otherwise reasonably cooperate with the Employer to correct
such Overpayment, including repayment of such Overpayment to the Employer.
8. No Obligation to Mitigate Damages. The Executive shall not be
---------------------------------
obligated to seek other employment in mitigation of amounts payable or
arrangements made under the provisions of this Agreement and the obtaining of
any such other employment shall in no event effect any reduction of the
Employer's obligations under this Agreement.
9. Enforcement; Arbitration.
------------------------
(a) In the event the Employer shall fail to pay any amounts due
to Executive or any successor under this Agreement or any
plan, program or arrangement referred to herein as they come
due, the Employer agrees to pay interest on such amounts at
the prime rate of interest as from time to time published in
The Wall Street Journal (Midwest Edition) plus four percent
-----------------------
(4%) per annum until paid.
(b) Each of the Employer and the Executive or any successor
shall have the right and option to elect to have any dispute
or controversy arising under
<PAGE>
or in connection with this Agreement, or any plan, program
or arrangement referred to herein, or any breach thereof,
settled exclusively by arbitration, conducted before an
arbitrator in accordance with rules of the American
Arbitration Association then in effect. Judgment may be
entered on the award of the arbitrator in any court having
jurisdiction. Any such arbitration shall be held in Chicago,
Illinois.
(c) The Employer shall pay all reasonable legal fees, costs of
litigation, and other reasonable expenses incurred by the
Executive or any successor who is successful pursuant to
legal judgment, arbitration or settlement in a challenge
resulting from the Employer's refusal to pay any amounts due
under this Agreement or any plan, program or arrangement
referred to herein to which it is determined that the
Executive or successor is entitled, or as a result of the
Employer's contesting the validity, enforceability or
interpretation of this Agreement or any such plan, program
or arrangement.
(d) As a condition precedent to the commencement of any action
under this Agreement or any plan, program or arrangement
referred to herein, each of the Employer or the Executive or
any successor agree to provide written notice ("initial
notice") at least fifteen (15) business days prior to
initiating any such action wherein such party shall (i)
agree to submit such dispute to non-binding mediation to be
held in Chicago, Illinois at JAMS/Endispute (or a similar
organization) within 30 days of such notice and (ii)
indicate whether such party is invoking arbitration pursuant
to Paragraph 10(b) above. The party receiving such notice
shall agree to submit to such mediation and, if the initial
notice did not include an election invoking arbitration,
then the receiving party may by written notice within ten
(10) business days following receipt of the initial notice
elect to invoke arbitration pursuant to said Paragraph
10(b).
10. Indemnification. In the event that legal action is instituted
---------------
against Executive during or after the term hereof by a third party (or parties)
based on the performance or nonperformance by Executive of his duties hereunder,
the Employer will assume the defense of such action by its attorney or attorneys
selected by the Employer reasonably satisfactory to the Executive and advance
the costs and expenses thereof (including reasonable attorneys' fees) without
prejudice to or waiver by the Employer of its rights and remedies against
Executive. In the event that there is a final judgment entered against
Executive in any such litigation, and Employer's Board of Directors determines
that Executive should, in accordance with its charter, By-Laws, or insurance
reimburse the Employer, Executive shall be liable to Employer for all such costs
and expenses paid or incurred by it in the defense of any such litigation (the
"Reimbursement Amount"). The Reimbursement Amount shall be paid by Executive
within thirty (30) days after rendition of the final judgment. The Employer
shall be entitled to set off the reimbursement amount against all sums which may
be owed or payable by the Employer to Executive hereunder or otherwise. The
parties shall cooperate in the defense of any asserted claim, demand or
liability against Executive or the Employer or its subsidiaries or affiliates.
The term "final judgment" as used herein shall be defined to mean the decision
of a court of competent jurisdiction, and in the event of an appeal, then the
decision of the appellate court,
<PAGE>
after petition for rehearing has been denied, or the time for filing the same
(or the filing of further appeal) has expired.
The rights to indemnification under this Paragraph 10 shall be in addition
to any rights which Executive may now or hereafter have under the charter or by-
laws of the Employer or any of its affiliates, under any insurance contract
maintained by the Employer or any of its affiliates or any agreement between
Executive and the Employer or any of its affiliates.
11. Payment in the Event of Death. Upon the death of the Executive
-----------------------------
prior to a termination, any payment due and owing by the Employer to Executive
under this Agreement shall be made to such beneficiary as Executive may
designate in writing, or failing such designation, the executor of his estate.
Upon the death of the Executive after a termination has occurred, then the
beneficiary designated by the Executive or, if no beneficiary has been
designated, his executor shall be entitled to a lump sum death benefit equal to
the present value of the payments that were remaining to be paid under Paragraph
6(a) as of the date of death. Such lump sum present value payment shall be
determined using an interest rate per annum equal to the prime rate of interest
as published in The Wall Street Journal (Midwest Edition) on the first business
-----------------------
day of the month in which the Executive's death occurred and shall be paid
within 30 days of the date of death. Such payments shall be in addition to the
amount of the bonus payment, if any, which may thereafter be due under Paragraph
6(b), any other death benefits provided by the Employer or under any plan,
program or arrangement maintained by the Employer.
12. Notices. Any notices, requests, demands and other communications
-------
provided for by this Agreement shall be sufficient if in writing and if sent by
registered or certified mail to the Executive at the last address he has filed
in writing the Employer or, in the case of the Employer, at its principal
executive offices.
13. Non-Alienation. The Executive shall not have any right to pledge,
--------------
hypothecate, anticipate or in any way create a lien upon any amounts provided
under this Agreement; and no benefits payable hereunder shall be assignable in
anticipation of payment either by voluntary or involuntary acts, or by operation
of law, except by will or the laws of descent and distribution.
14. Governing Law. The provisions of this Agreement shall be construed
-------------
in accordance with the laws of the State of Illinois.
15. Amendment. This Agreement may be amended or canceled by mutual
---------
agreement of the parties in writing (which, with respect to the Employer in the
case of an amendment prior to the Effective Date of the Agreement, shall have
been approved by resolution of a majority of the non-employee members of the
Board of Directors of the Employer) without the consent of any other person and,
so long as the Executive lives, no person, other than the parties hereto, shall
have any rights under or interest in this Agreement or the subject matter
hereof.
16. Binding Effect; Successors. Except as otherwise provided herein,
--------------------------
this Agreement shall be binding upon and inure to the benefit of the Employer
and any successor of the Employer and to the benefit of Executive's executors,
administrators, legal
<PAGE>
representatives, heirs and legatees. The Employer shall require any successor or
assignee, whether direct or indirect, by purchase, merger, consolidation or
otherwise, expressly and unconditionally to assume and agree to perform the
Employer's obligations under this Agreement, whereupon such successor or
assignee shall become the Employer hereunder.
17. Severability. In the event that any provision or portion of
------------
this Agreement shall be determined to be invalid or unenforceable for any
reason, the remaining provisions of this Agreement shall be unaffected thereby
and shall remain in full force and effect.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and,
pursuant to the authorization from its Board of Directors, the Employer has
caused this Agreement to be executed in its name on its behalf, and its
corporate seal to be hereunto affixed and attested by its Secretary, all as of
the day and year first above written.
________________________________
Executive
FIRST OAK BROOK BANCSHARES, INC.,
a Delaware Corporation
By:_____________________________
Its:____________________________
ATTEST:
____________________
Secretary
<PAGE>
EXHIBIT (10.10)
TRANSITIONAL EMPLOYMENT AGREEMENT
(SENIOR OFFICER GROUP)
----------------------
This Agreement is made as of the 26th day of January, 1999, by and between
First Oak Brook Bancshares, Inc., a Delaware corporation (the "Employer") and
the undersigned executive officer (the "Executive").
W I T N E S S E T H:
WHEREAS, the Executive has been employed for some years past by the
Employer and/or one or more of its subsidiaries; and
WHEREAS, the Employer wishes to assure both itself and the Executive of
continuity of management in the event of any actual Change in Control (as
defined in Paragraph 2) of the Employer on the terms and conditions set forth
herein; and
WHEREAS, the Executive desires to provide such services and continuity; and
WHEREAS, to achieve this purpose, the Board of Directors of the Employer
considered and approved this Agreement to be entered into with the Executive as
being in the best interests of the Employer and its stockholders;
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein, the parties hereto agree as follows:
1. Term This Agreement shall become effective upon the occurrence of
----
a Change in Control (as defined in Paragraph 2, below) (hereinafter called the
"Effective Date of this Agreement") and shall remain in effect for a term
continuing until the end of the thirty-sixth (36th) calendar month following the
month in which the Effective Date of this Agreement occurs; provided, however,
that, anything in this Agreement to the contrary notwithstanding, if a Change in
Control occurs and if the Executive's employment with the Employer was
terminated within six (6) months prior to the date on which the Change in
Control occurs, and if it is reasonably demonstrated by the Executive that such
termination of employment (a) was at the request of a third party who was taking
steps reasonably calculated to effect a Change in Control or (b) otherwise arose
in connection with or anticipation of a Change in Control, then for all purposes
of this Agreement the "Effective Date of this Agreement" shall mean the date
immediately prior to the date of such termination of employment.
<PAGE>
2. Change in Control. For the purposes of this Agreement, a "Change in
-----------------
Control" shall be deemed to have occurred if:
(a) Any "person" is or becomes the "beneficial owner" directly or
indirectly of securities of the Employer representing more than
fifty percent (50%) of the combined voting power of the
Employer's then outstanding securities entitled to vote generally
in the election of directors (the "Voting Stock"); or
(b) Continuing Directors cease for any reason to constitute at least
a majority of the entire Board of Directors of the Employer; or
(c) The consummation of a business combination involving the Employer
(or any direct or indirect subsidiary of the Employer) occurs,
unless after such a business combination (i) the shareholders of
the Employer immediately prior to the business combination
continue to own, directly or indirectly, more than fifty percent
(50%) of the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of
directors of the new (or continuing) entity immediately after the
business combination, and (ii) at least a majority of the members
of the board of directors of the entity resulting from the
business combination were Continuing Directors at the time of the
execution of the initial agreement, or of the action of the
Board, providing for such business combination; or
(d) A complete liquidation or dissolution of the Employer or
consummation of the sale or other disposition of all or
substantially all of the assets of the Company.
For purposes of foregoing, "person" and "beneficial owner" shall be as defined
in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended,
and the regulations thereunder. A Change in Control shall not be deemed to have
occurred under subparagraph (a) above, if the beneficial owner is a corporation
owned directly or indirectly by the shareholders of the Employer in
substantially the same proportions as their ownership of the Voting Stock, an
employee benefit plan of the Employer or any subsidiary of the Employer, or any
person who, as of January 26, 1999, is the beneficial owner of more than fifty
percent (50%) of the Voting Stock. For purposes of subparagraph (b), an
individual will be a "Continuing Director" if he or she is a director of the
Employer on January 26, 1999, or becomes a director of the Employer thereafter,
provided the individual was elected, or was nominated for an election to occur
at a meeting of stockholders, by a majority of the Continuing Directors still in
office; provided, however, that in no event shall an individual be considered a
Continuing Director if the individual was designated for election or nomination
by a person who has entered into an agreement with the Employer to effect an
acquisition described in subparagraph (a) or a business combination described in
subparagraph (c). For purposes of subparagraph (c), a business combination
shall mean a merger or consolidation, or an issuance of securities by the
Employer in connection with a merger or consolidation, involving the Employer
(or any direct or indirect subsidiary of the Employer).
<PAGE>
3. Employment. The Employer hereby agrees to continue or to cause one of
----------
its affiliates to continue the Executive in its employ for a period of thirty-
six (36) months commencing on the Effective Date of this Agreement (the
"Employment Period") with title, duties and responsibilities comparable to those
of the Employer's or Oak Brook Bank's senior bank officers immediately prior to
the Effective Date of this Agreement, as the same may from time to time be
assigned or reassigned to the Executive by the Board of Directors of the
Employer or such affiliate which employs Executive.
4. Compensation, Compensation Plans, Benefits and Perquisites. During the
----------------------------------------------------------
Employment Period, the Executive shall:
(a) Receive an annual salary at a rate which is not less than his
rate of annual salary immediately prior to the Effective Date of
this Agreement, with the opportunity for increases from time to
time thereafter which are in accordance with the regular
practices of the Employer or its affiliates (which for purposes
of this Agreement, shall mean any corporation or enterprise
which, as of a given date, is a member of the same controlled
group of corporations, the same group of trades or businesses
under common control or the same affiliated service group,
determined in accordance with Section 414(b), (c), (m) or (o) of
the Code (as defined in Paragraph 8(a) hereof), as is the
Employer) with respect to executives with comparable duties;
(b) Be eligible to participate on a comparable basis, in each
calendar year during which the Employment Period runs, in an
annual bonus program maintained by the Employer or its affiliates
in which executives with comparable duties are eligible to
participate, provided that the annual bonus payable thereunder
shall not be less than the average annual bonus accrued for the
Executive during the three calendar years immediately preceding
the Effective Date of this Agreement;
(c) Be eligible to participate on a comparable basis in the stock
option or other equity incentive plans and any other bonus
incentive compensation plans maintained from time to time by the
Employer or its affiliates during the Employment Period and in
which executives with comparable duties are eligible to
participate;
(d) Be entitled to participate (i) in any group or executive medical,
dental, disability, life insurance, retirement, profit sharing,
thrift and other plans and programs, including nonqualified and
deferred compensation plans and programs, maintained from time to
time by the Employer or its affiliates during the Employment
Period and in which executives with comparable duties are
eligible to participate and (ii) in the Executive Medical Plan,
split-dollar and other special life insurance arrangements, to
the same extent the Executive participated in such benefits
before the Effective Date of the Agreement; and
<PAGE>
(e) Be entitled to receive vacation and perquisites which are
provided by the Employer or its affiliates from time to time
during the Employment Period to executives with comparable
duties, but in no event less favorable than the vacation and
perquisites to which he was entitled immediately prior to the
Effective Date of this Agreement (including, but not limited to,
company car and allowances, club memberships and dues,
subscriptions and travel).
5. Termination During Employment Period.
------------------------------------
(a) For purposes of this Agreement, the term "termination" shall mean
(i) termination by the Employer of the employment of the
Executive with the Employer and all of its affiliates for any
reason other than death, disability or "cause" (as defined
below), or (ii) resignation of the Executive for "constructive
discharge" (as defined below).
(b) The term "constructive discharge" shall mean the Executive's
resignation from the Employer and all of its affiliates upon any
one of the following:
(i) the failure of the Employer to pay or provide the
compensation, benefits and perquisites contemplated by
Paragraph 4, other than an isolated, insubstantial and
inadvertent failure not taken in bad faith and which is
remedied by the Employer promptly after receipt of notice
thereof given by Executive;
(ii) there shall have occurred a material diminution in the
Executive's duties and responsibilities from those in
effect prior to the Effective Date of this Agreement, other
than an isolated, insubstantial and inadvertent failure not
taken in bad faith and which is remedied by the Employer
promptly after receipt of notice thereof given by
Executive;
(iii) the Employer changes the Executive's (A) primary employment
location to a place that is more than 35 miles from
Executive's primary employment location as of the Effective
Date of the Agreement and/or (B) regularly scheduled work
hours significantly from such hours as of the Effective
Date of the Agreement; and/or
(iv) at any time for any reason prior to the first anniversary
of the Effective Date of the Agreement provided that at the
time of such resignation the employment of Richard M.
Rieser, Jr. with the Employer and all affiliates has
terminated or there has been an announcement by the
Employer or Mr. Rieser that such termination will occur
prior to the 18-month anniversary of Effective Date of the
Agreement.
(c) The term "cause" means (i) felony conviction resulting from an
act or acts of dishonesty or breach of trust, other than a felony
predicated upon the
<PAGE>
Executive's vicarious liability or (ii) the Executive's continued
and willful failure to substantially perform his duties under
this Agreement. For purposes of this paragraph, no act or failure
to act on the Executive's part will be considered "willful"
unless done, or omitted to be done, by him not in good faith and
without reasonable belief that his action or omission was in the
interests of the Employer and its affiliates or not opposed to
the interests of the Employer and its affiliates.
6. Confidentiality. The Executive agrees that during and after the
---------------
Employment Period, he shall retain in confidence any confidential information
known to him concerning the Employer and its affiliates and their respective
businesses for as long as such information is not publicly disclosed.
7. Termination Benefits. In the event of a termination of the
--------------------
Executive during the Employment Period, the Employer shall provide or shall
cause one or more of its affiliates to provide, and the Executive shall, upon
execution of a Release and Severance Agreement in the form attached hereto as
Appendix A, shall be entitled to receive the following:
(a) The Executive shall, notwithstanding such termination, be
entitled to continue to receive salary payments for thirty-six
(36) months from the date of termination (which thirty-six month
period shall be treated hereunder as a continuation of Employment
Period) based on the rate of annual salary equal to the average
annual salary received by the Executive during the five calendar
years immediately preceding the calendar year in which the
Effective Date of this Agreement occurs (the "Averaging Period"),
provided that the payments pursuant to this Paragraph 7(a) shall
be subject to reduction in accordance with Paragraph 8(a).
(b) The Executive shall receive a bonus payment with respect to each
calendar year ending within such thirty-six month period equal to
the average annual bonus payments received by the Executive
during the Averaging Period. The bonus payment for each calendar
year shall be made within 30 days of the end of the calendar year
to which such bonus relates. The bonus payments described in this
Paragraph 7(b) shall be subject to reduction in accordance with
Paragraph 8(a).
(c) Payment of all accrued but deferred bonuses as of the Effective
Date of this Agreement, or if later, the date of termination,
which payments shall be made in installments on such dates and in
such amounts as such bonuses would have been paid notwithstanding
such termination.
(d) The Executive (and, if applicable, Executive's dependents) shall
be entitled to maintain group medical and dental coverage under
the continuation coverage provisions of such plans ("COBRA
Coverage"), which entitlement shall, notwithstanding any other
provisions of the group plan to the contrary, be subject to
termination only in the event of the failure of the Executive or
the dependent to timely pay the appropriate premium for such
coverage, provided, that the Employer shall pay on behalf of the
Executive
<PAGE>
(and, if applicable, the Executive's dependents) the appropriate
premium for the first 36 months of such coverage, and, provided
further that such coverage shall be secondary to any group
coverage (including Medicare or any government-sponsored or
mandated program) subsequently obtained or covering the Executive
or dependent.
(e) From and after the date of a termination until full satisfaction
of the obligations of the Employer hereunder and under the plans,
programs and arrangements referred to herein and under any other
agreement with respect to which Employer may be obligated to make
post-employment payments to the Executive, the Employer shall
maintain a grantor trust in form and substance reasonably
acceptable to Executive to assist the Employer in the discharge
of its obligations hereunder and under any other nonqualified,
deferred compensation plan maintained by the Employer under which
Executive has an interest. The Employer shall deposit assets and
make contributions into the grantor trust in amounts necessary to
maintain the assets of the grantor trust at a level equal to the
present value of the obligations of the Employer to the Executive
under this Agreement and any such plans, programs or
arrangements. Such amounts due shall be paid from the grantor
trust or by the Employer directly, in which case the Employer
shall be entitled to reimbursement form the grantor trust.
8. Reduction of Payments Due to Excise Tax.
---------------------------------------
(a) If it is determined (in the reasonable opinion of independent
public accountants then regularly retained by the Employer in
consultation with tax counsel acceptable to Executive), that any
amount payable to Executive by the Employer under this Agreement
or any other plan, program or arrangement under which Executive
participates or is a party would constitute an "excess parachute
payment" within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended from time to time (the "Code"),
subject to the excise tax imposed by Section 4999 of the Code, as
amended from time to time (the "Excise Tax"), then the amounts
payable to the Executive shall be reduced to the extent necessary
so that no portion of such amounts payable to the Executive is
subject to the Excise Tax. The determination of the amount of
reduction, if any, in the amounts payable to the Executive under
Paragraphs 7(a) and 7(b) under Paragraphs 7(a) and 7(b) shall be
made in good faith by the Employer's Compensation Committee after
consultation with the independent public accountants then
regularly retained by the Employer and tax counsel acceptable to
the Executive, and a written statement setting forth the
calculation thereof shall be provided to the Executive. If
amounts payable to the Executive are to be reduced pursuant to
this Paragraph 8(a), the Employer's Compensation Committee, after
consultation with the Executive, shall determine the payments to
be so reduced.
(b) In the event it is determined that the Excise Tax may be imposed
on the Executive prior to any reductions pursuant to the
preceding Paragraph
<PAGE>
8(a), the Employer and the Executive agree to take such actions
as they may, in good faith, agree to take to avoid any such
reduction.
(c) The Employer shall withhold from any amounts paid under this
Agreement the amount of any applicable federal, state, or local
taxes then required to be withheld. Computations under this
Paragraph 8 shall be made by the independent public accountants
then regularly retained by the Employer in consultation with tax
counsel acceptable to Executive. The Employer shall pay all
accountants' and tax counsel's fees and expenses.
9. No Obligation to Mitigate Damages. The Executive shall not be
---------------------------------
obligated to seek other employment in mitigation of amounts payable or
arrangements made under the provisions of this Agreement and the obtaining of
any such other employment shall in no event effect any reduction of the
Employer's obligations under this Agreement.
10. Enforcement; Arbitration.
------------------------
(a) In the event the Employer shall fail to pay any amounts due to
Executive or any successor under this Agreement or any plan,
program or arrangement referred to herein as they come due, the
Employer agrees to pay interest on such amounts at the prime rate
of interest as from time to time published in The Wall Street
---------------
Journal (Midwest Edition) plus four percent (4%) per
-------
annum until paid.
(b) Each of the Employer and the Executive or any successor shall
have the right and option to elect to have any dispute or
controversy arising under or in connection with this Agreement,
or any plan, program or arrangement referred to herein, or any
breach thereof, settled exclusively by arbitration, conducted
before an arbitrator in accordance with rules of the American
Arbitration Association then in effect. Judgment may be entered
on the award of the arbitrator in any court having jurisdiction.
Any such arbitration shall be held in Chicago, Illinois.
(c) The Employer shall pay all reasonable legal fees, costs of
litigation, and other reasonable expenses incurred by the
Executive or any successor who is successful pursuant to legal
judgment, arbitration or settlement in a challenge resulting from
the Employer's refusal to pay any amounts due under this
Agreement or any plan, program or arrangement referred to herein
to which it is determined that the Executive or successor is
entitled, or as a result of the Employer's contesting the
validity, enforceability or interpretation of this Agreement or
any such plan, program or arrangement.
(d) As a condition precedent to the commencement of any action under
this Agreement or any plan, program or arrangement referred to
herein, each of the Employer or the Executive or any successor
agree to provide written notice ("initial notice") at least
fifteen (15) business days prior to initiating any such action
wherein such party shall (i) agree to submit such dispute to non-
binding mediation to be held in Chicago, Illinois at
JAMS/Endispute (or a similar organization) within 30 days of such
notice and (ii) indicate
<PAGE>
whether such party is invoking arbitration pursuant to Paragraph
10(b) above. The party receiving such notice shall agree to
submit to such mediation and, if the initial notice did not
include an election invoking arbitration, then the receiving
party may by written notice within ten (10) business days
following receipt of the initial notice elect to invoke
arbitration pursuant to said Paragraph 10(b).
11. Indemnification. In the event that legal action is instituted against
---------------
Executive during or after the term hereof by a third party (or parties) based on
the performance or nonperformance by Executive of his duties hereunder, the
Employer will assume the defense of such action by its attorney or attorneys
selected by the Employer reasonably satisfactory to the Executive and advance
the costs and expenses thereof (including reasonable attorneys' fees) without
prejudice to or waiver by the Employer of its rights and remedies against
Executive. In the event that there is a final judgment entered against Executive
in any such litigation, and Employer's Board of Directors determines that
Executive should, in accordance with its charter, By-Laws, or insurance
reimburse the Employer, Executive shall be liable to Employer for all such costs
and expenses paid or incurred by it in the defense of any such litigation (the
"Reimbursement Amount"). The Reimbursement Amount shall be paid by Executive
within thirty (30) days after rendition of the final judgment. The Employer
shall be entitled to set off the reimbursement amount against all sums which may
be owed or payable by the Employer to Executive hereunder or otherwise. The
parties shall cooperate in the defense of any asserted claim, demand or
liability against Executive or the Employer or its subsidiaries or affiliates.
The term "final judgment" as used herein shall be defined to mean the decision
of a court of competent jurisdiction, and in the event of an appeal, then the
decision of the appellate court, after petition for rehearing has been denied,
or the time for filing the same (or the filing of further appeal) has expired.
The rights to indemnification under this Paragraph 11 shall be in addition
to any rights which Executive may now or hereafter have under the charter or by-
laws of the Employer or any of its affiliates, under any insurance contract
maintained by the Employer or any of its affiliates or any agreement between
Executive and the Employer or any of its affiliates.
12. Payment in the Event of Death. Upon the death of the Executive
-----------------------------
prior to a termination, any payment due and owing by the Employer to Executive
under this Agreement shall be made to such beneficiary as Executive may
designate in writing, or failing such designation, the executor of his estate.
Upon the death of the Executive after a termination has occurred, then the
beneficiary designated by the Executive or, if no beneficiary has been
designated, his executor shall be entitled to a lump sum death benefit equal to
the present value of the payments that were remaining to be paid under Paragraph
7(a) as of the date of death. Such lump sum present value payment shall be
determined using an interest rate per annum equal to the prime rate of interest
as published in The Wall Street Journal (Midwest Edition) on the first business
-----------------------
day of the month in which the Executive's death occurred and shall be paid
within 30 days of the date of death. Such payments shall be in addition to the
amount of the bonus payment, if any, which may thereafter be due under Paragraph
7(b), any other death benefits provided by the Employer or under any plan,
program or arrangement maintained by the Employer.
13. Notices. Any notices, requests, demands and other communications
-------
provided for by this Agreement shall be sufficient if in writing and if sent by
registered or certified mail to the
<PAGE>
Executive at the last address he has filed in writing the Employer or, in the
case of the Employer, at its principal executive offices.
14. Non-Alienation. The Executive shall not have any right to pledge,
--------------
hypothecate, anticipate or in any way create a lien upon any amounts provided
under this Agreement; and no benefits payable hereunder shall be assignable in
anticipation of payment either by voluntary or involuntary acts, or by operation
of law, except by will or the laws of descent and distribution.
15. Governing Law. The provisions of this Agreement shall be construed
-------------
in accordance with the laws of the State of Illinois.
16. Amendment. This Agreement may be amended or canceled by mutual
---------
agreement of the parties in writing (which, with respect to the Employer in the
case of an amendment prior to the Effective Date of the Agreement, shall have
been approved by resolution of the Board of Directors of the Employer) without
the consent of any other person and, so long as the Executive lives, no person,
other than the parties hereto, shall have any rights under or interest in this
Agreement or the subject matter hereof.
17. Binding Effect; Successors. Except as otherwise provided herein,
--------------------------
this Agreement shall be binding upon and inure to the benefit of the Employer
and any successor of the Employer and to the benefit of Executive's executors,
administrators, legal representatives, heirs and legatees. The Employer shall
require any successor or assignee, whether direct or indirect, by purchase,
merger, consolidation or otherwise, expressly and unconditionally to assume and
agree to perform the Employer's obligations under this Agreement, whereupon such
successor or assignee shall become the Employer hereunder.
18. Severability. In the event that any provision or portion of this
------------
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and,
pursuant to the authorization from its Board of Directors, the Employer has
caused this Agreement to be executed in its name on its behalf by the
undersigned officers, duly authorized, all as of the day and year first above
written.
___________________________________
Executive
FIRST OAK BROOK BANCSHARES, INC.,
a Delaware Corporation
By:________________________________
Its: President
ATTEST:
_______________________
Secretary
<PAGE>
APPENDIX A
RELEASE AND SEVERANCE AGREEMENT
-------------------------------
THIS RELEASE AND SEVERANCE AGREEMENT is made and entered into this ____ day
of _______________, _____ by and between First Oak Brook Bancshares, Inc., its
subsidiaries and affiliates (collectively "FOBB") and
_____________________________ (hereinafter "EMPLOYEE").
EMPLOYEE'S employment with FOBB terminated on ______________, ______; and
EMPLOYEE has voluntarily agreed to the terms of this RELEASE AND SEVERANCE
AGREEMENT in exchange for Termination Benefits under the Transitional Employment
Agreement ("Transitional Agreement") to which EMPLOYEE otherwise would not be
entitled.
NOW THEREFORE, in consideration for Termination Benefits provided under the
Transitional Agreement, EMPLOYEE on behalf of himself and his spouse, heirs,
executors, administrators, children, and assigns does hereby fully release and
discharge FOBB, its officers, directors, employees, agents, subsidiaries and
divisions, benefit plans and their administrators, fiduciaries and insurers,
successors, and assigns from any and all claims or demands for wages, back pay,
front pay, attorney's fees and other sums of money, insurance, benefits,
contracts, controversies, agreements, promises, damages, costs, actions or
causes of action and liabilities of any kind or character whatsoever, whether
known or unknown, from the beginning of time to the date of these presents,
relating to his employment or termination of employment from FOBB, including but
not limited to any claims, actions or causes of action arising under the
statutory, common law or other rules, orders or regulations of the United States
or any State or political subdivision thereof including the Age Discrimination
in Employment Act and the Older Workers Benefit Protection Act.
EMPLOYEE acknowledges that EMPLOYEE'S obligations pursuant to Paragraph 6
of the Transitional Agreement relating to the use or disclosure of confidential
information shall continue to apply to EMPLOYEE.
This Release and Settlement Agreement supersedes any and all other
agreements between EMPLOYEE and FOBB except agreements relating to proprietary
or confidential information belonging to FOBB, and any other agreements,
promises or representations relating to severance pay or other terms and
conditions of employment are null and void.
This release does not affect EMPLOYEE'S right to any benefits to which
EMPLOYEE may be entitled under any employee benefit plan, program or arrangement
sponsored by FOBB, including but not limited to the Transitional Agreement and
the plans, programs and arrangements referred to therein.
EMPLOYEE and FOBB acknowledge that it is their mutual intent that the Age
Discrimination in Employment Act waiver contained herein fully comply with the
Older Workers Benefit Protection Act. Accordingly, EMPLOYEE acknowledges and
agrees that:
<PAGE>
(a) The Termination Benefits exceed the nature and scope of that to
which he would otherwise have been legally entitled to receive.
(b) Execution of this Agreement and the Age Discrimination in
Employment Act waiver herein is his knowing and voluntary act;
(c) He has been advised by FOBB to consult with his personal attorney
regarding the terms of this Agreement, including the
aforementioned waiver;
(d) He has had at least forty-five (45) calendar days within which to
consider this Agreement;
(e) He has the right to revoke this Agreement in full within seven
(7) calendar days of execution and that none of the terms and
provisions of this Agreement shall become effective or be
enforceable until such revocation period has expired;
(f) He has been informed in writing of (i) the eligibility factors
under the Plan, (ii) the group of employees, including the job
title and age of each, eligible to receive Termination Benefits,
(iii) the ages of all individuals in the same job classification
or organizational unit who are not eligible to receive
Termination Benefits, and (iv) any time limit applicable to the
Plan;
(g) He has read and fully understands the terms of this agreement;
and
(h) Nothing contained in this Agreement purports to release any of
EMPLOYEE's rights or claims under the Age Discrimination in
Employment Act that may arise after the date of execution.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
indicated above.
FIRST OAK BROOK BANCSHARES, INC., EMPLOYEE
for itself and
its Subsidiaries and Affiliates
By:__________________________ _______________________
Its:_________________________
<PAGE>
First Oak Brook Bancshares, Inc. Corporate Profile
- --------------------------------------------------------------------------------
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 293 full-
time equivalent employees.
Oak Brook Bank offers full-service banking, investment management and trust, and
related financial services through a network of 11 offices in suburban Chi-
cagoland.
Our Markets
The Company is headquartered and its largest banking office is located in Oak
Brook, Illinois, twenty miles west of downtown Chicago. Ten of its offices are
located in the western suburbs of Chicago, nine of which are in DuPage County.
DuPage, the second largest county in Illinois, has a population of approxi-
mately 870,000 and enjoys the second highest median family income in the state.
Its other office is located on Chicago's affluent North Shore. The Company mar-
kets its products and services through regional advertising.
- -------------------------------------------------------------------------------
Table of Contents
<TABLE>
<S> <C> <C><C>
1 Financial Highlights 32 Consolidated Financial Statements__
2 Message to Shareholders________ 36 Notes to Consolidated Financial
14 Management Discussion and Analysis_ Statements______________________
31 Report of Independent Auditors_____ 49 Corporate and Shareholder Informa-
tion____________________________
</TABLE>
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This annual report to shareholders contains certain forward looking statements
consisting of estimates with respect to the financial condition, results of op-
erations and business of the Company that are subject to various factors which
could cause actual results to differ from these estimates. These factors in-
clude, but are not limited to, changes in: general economic conditions, inter-
est rates, legislative or regulatory changes, stock market performance, year
2000 issues, loan demand and depositor preferences. These risks and
uncertainties should be considered in evaluating forward-looking statements.
First Oak Brook Bancshares, Inc.
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At and for the year ended
(Dollars in thousands December 31,
except per share amounts) 1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Net Income
Net income $ 9,441 $ 13,753 $ 7,107
Net income before
special items/1/ $ 9,441 $ 8,670 $ 7,107
Performance Ratios
Return on average assets 1.02% 1.76% .97%
Return on average equity 12.74% 21.72% 12.77%
Per Share
Basic earnings per share $ 1.42 $ 2.09 $ 1.06
Diluted earnings per
share 1.39 2.03 1.03
Book value at year-end 11.46 10.38 8.62
Market price at year-end 18.50 24.00 11.63
Cash dividends paid
Class A common .345 .270 .190
Common .288 .222 .158
Balance Sheet Highlights
Total assets $1,009,275 $816,144 $768,655
Loans, net of unearned
discount 631,987 447,332 420,164
Demand deposits 187,209 153,806 147,497
Total deposits 777,802 627,763 648,303
Shareholders' equity 77,061 71,661 59,553
</TABLE>
- --------------------------------------------------------------------------------
/1/Represents net income before the net gain on the credit card portfolio sale
on June 30, 1997
Stock Performance and Dividend Information
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Per Share
-----------------------------------------------
Diluted Dividends Paid Class A/1/
Net -------------- Book --------------------
Income Class A Common Value Low Price High Price
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Quarter Ended
December 31, 1998 $ .40 $.090 $.075 $11.46 $17.75 $20.25
September 30, 1998 .37 .090 .075 11.26 19.75 22.56
June 30, 1998 .32 .090 .075 10.78 22.44 25.50
March 31, 1998 .30 .075 .063 10.69 20.75 25.44
December 31, 1997 .32 .075 .063 10.38 17.69 25.19
September 30, 1997 .33 .065 .053 10.14 15.38 17.38
June 30, 1997 1.06 .065 .053 9.69 12.38 16.38
March 31, 1997 .32 .065 .053 8.66 11.38 12.94
- ----------------------------------------------------------------------
</TABLE>
/1/The prices shown represent the high and low closing sales price for the
quarter.
1
First Oak Brook Bancshares, Inc.
<PAGE>
To Our Shareholders
- -------------------------------------------------------------------------------
It's hard to believe we passed the $1 billion asset mark. This accomplish-
ment is astounding to those of us who remember the day twenty five years ago
when we acquired the $11 million asset Heritage Bank of Addison. That was the
launching pad for First Oak Brook Bancshares, Inc., which has become one of
the largest independent, publicly-traded bank holding companies headquartered
in Illinois.
Our Humble Start
Since many of our customers and investors know little about our history,
perhaps we should explain how we started. In 1974, Gene Heytow, Rick Rieser,
Marcel Lutwak and a group of Chicago area investors, who together already con-
trolled Amalgamated Bank in downtown Chicago and the Metropolitan Bank on
Chicago's southwest side, bought 51% of the Heritage Bank of Addison.
When we acquired it, Heritage was saddled with a number of loans to borrow-
ers who were hard pressed to stay current when interest rates spiked to 12%.
Rick Rieser, then our President and a banking lawyer by training, headed our
work-out efforts. Before long, unsecured loans got secured, undersecured loans
became well-secured, and payment programs were structured. Through active in-
tervention, write-offs were minimized.
Evicted
Rick's aggressive collection efforts were not uniformally productive. For
example, one borrower who had ceased making payments on a commercial loan also
happened to be the Bank's landlord. Rick offset the rent due against the loan
payments, ignoring a basic principle of real estate law that there can be no
setoffs against rent. Shortly, the Bank received a 5 day eviction notice,
leaving Heritage no place to operate.
Rick will never forget the Friday night phone call he had to make to his
partners to break the news. Instead of a justly deserved rebuke, Rick got to-
tal support and an introduction to one of the best litigators in Chicago, Don
Reuben of Kirkland & Ellis. In a few weeks, we had a deal to buy the bank
building from the debtor and for him to retire his loan from the proceeds.
While the purchase price looked a little rich at the time, within a few years,
given the inflation of the late 1970's, the sow's ear turned into a silk
purse.
The Original Oak Brook Bank
Just two years later in 1976, our group's reputation as clean-up experts
earned us an invitation to meet with the key shareholders of the $53 million
asset Oak Brook Bank. This was the largest and oldest of three banks serving
that rapidly growing, upscale western suburban community. Oak Brook was then
the 13th largest corporate headquarters city in America, ranking ahead of
Philadelphia. Over 150 of the Fortune 1000 maintained an account with us.
But Oak Brook Bank had become a victim of its own success. The faster depos-
its flowed in, the more pressure the bank felt to put out loans. Unfortunate-
ly, its commercial lending practices had failed to keep up with its corporate
cash management prowess. One pundit said you could get money more easily from
Oak Brook Bank with a pen than with a gun. The Heytow group recapitalized the
bank and
<TABLE>
<S> <C> <C> <C>
1974 1976 1977 1983
Founding family bought Oak Brook Bank was First National Bank First Oak
Heritage Bank of Addison. acquired.($53 million of Oak Brook was acquired Bancshares was formed
($11 million in assets) in assets) ($27 million in assets) with 3 subsidiary banks
and $177 million in assets.
</TABLE>
2
First Oak Brook Bancshares, Inc.
<PAGE>
- -------------------------------------------------------------------------------
installed a new senior management team led by Charlie Morris. With a $4 million
capital infusion and work-out skills honed previously in Addison, the bank
returned to profitability within a few months. The rescue went so smoothly the
bank lost only two large customers in the process.
Our Secret Formula
By this time, we had developed three guiding principles. First, guard our
reputation for prudence and diligence. That reputation had earned us both the
opportunity to acquire Heritage and Oak Brook and the access to capital--with
out capital, the opportunity alone would have been meaningless. George Baker and
Ken Chalmers at Continental Bank and John Ballantine at First National Bank
financed us in large part because of their confidence in our banking skills. We
were determined never to do anything which could compromise that faith.
Second, make loans carefully. We learned that careless lending sacrificed
valuable time which could be spent better caring for our good customers and
developing new ones. Worse, losses in a low margin business like banking could
rarely be recouped. We learned to accept somewhat lower returns if they came
with less than average risk. After all, it was our money.
Third, build a downtown bank in the suburbs--a bank offering the commercial
services of a money center bank and the personal attention of a community
bank. We realized this would be a costly undertaking--both in attracting and
retaining first-rate bankers and investing in products and systems comparable
to the Loop banks. Nevertheless, we believed that if we strove for this goal,
we surely would be a long-term survivor.
Founding First Oak Brook Bancshares
Only a year after acquiring Oak Brook Bank, another opportunity arose which we
couldn't pass up. In 1977, Illinois was still a unit-banking state; this meant
every bank was separately chartered and branches were severely restricted. In
short, local charters were geographically protected from intrusion by non-local
banks. And Oak Brook, home to many businesses and over 21,000 workers daily, had
only three charters--ours at Oak Brook Bank, First National Bank of Oak Brook
across the street in the McDonald's world headquarters, and First Security Bank
(later acquired by Northern Trust). Through a mutual friend, we met Frank Paris,
a minority First National shareholder and founder of Paris, O'Day & Reed, a
successful, specialized insurance broker in Oak Park (which he later sold to
Alexander & Alexander). He told us that First National's board was squabbling;
there were nine directors and seven factions. He believed he could acquire a
controlling interest in First National, but he wanted partners like us with
experience in turning around difficult banking situations. We jumped at the
chance to obtain the second best franchise in one of the best banking markets in
the country. DuPage County was among the top 10 counties in America in growth
and income, and Oak Brook was the corporate vortex of this expanding, affluent
market. Trouble was, the anti-trust laws banned ownership of a national bank and
any other bank in the same community. However, the Regional Director of the
Office of Comptroller of the Currency was deeply troubled by the unresponsive
management at First National. He told our group we could proceed and manage
First National through a consulting agreement. With Frank's efforts, we acquired
control of First National. Frank Paris still serves as our Vice-Chairman, in
addition to his duties as Mayor of River Forest, Illinois.
<TABLE>
<S> <C> <C> <C>
1983 1984 1985 1985
First Oak Brook First Oak Brook First Oak Brook Lisle Office opened
Bancshares acquired Bancshares reached $213 Bancshares went public. First Oak Brook
Warrenville Bank & Trust million in assets. Bancshares had
($13 million in assets) $252 million in assets.
</TABLE>
3
First Oak Brook Bancshares, Inc.
<PAGE>
To Our Shareholders
- -------------------------------------------------------------------------------
[CHART APPEARS HERE]
Shortly thereafter, we combined the back offices of our two banks in Oak
Brook--one of the first consolidation efforts of this kind in Illinois. We
also brought George Clam, a young MBA from Northwestern, from Amalgamated Bank
into the $27 million asset First National as its new President. George, of
course, currently serves as President of Oak Brook Bank.
In 1983, the face of Illinois banking changed forever. After years of lobby
ing, financial institution reform arrived. Illinois banks in existence five
years or more would be permitted to combine into bank holding companies. For
us, this meant our three banks could unite, forming a single $177 million as
set entity with earnings of $1.5 million annually. Combining all our resources
allowed us a sufficient earnings base to permit rational expansion.
Just after merging the banks into privately-held First Oak Brook Bancshares,
Inc, a newly created Delaware multi-bank holding company, we acquired Warren
ville Bank & Trust Co., the second smallest and second oldest banking charter
in DuPage. The $13 million asset Warrenville Bank gave us a foothold in the
less-developed western part of the county, just north of Naperville. For the
first time, we were able to complete an acquisition corporately, instead of
having to raise capital through individual investors--another benefit of hold
ing company status.
Scoping Out the Game Plan
But without doubt, the biggest benefit of holding company status was the op
portunity to plan strategically. As we surveyed the DuPage landscape, we iden
tified much that had changed and much that we correctly predicted was likely
to change. Illinois banks' historical monopolies were giving way to deregula
tion. The geographic monopoly was receding as branch laws liberalized, permit
ting us to compete more fairly with thrifts, which already had unlimited
branching privileges. Federal interest rate protection under Regulation Q
which put ceilings on interest rates payable on consumer CD's and savings ac
counts--gave way when unregulated money market mutual funds started combining
small consumer deposits into negotiated rate CD's. And product protections
were eroding as banks, prohibited from paying interest on checking accounts,
faced competition from thrifts, which were permitted to issue consumers inter
est-bearing Negotiable Orders of Withdrawal (NOWs)--really nothing more than
interest bearing checking accounts. The ban on corporations having savings ac
counts was loosened. Bank-sponsored money market funds were introduced. In
short, the clear distinctions between products offered by banks, thrifts,
credit unions, brokers, and insurance companies were rapidly disappearing.
In this less regulated banking climate, the chance to map our future became
more than appealing; it became necessary. As early entrants into the cash man-
agement business--selling lockbox services, controlled disbursements, invest-
ment sweep accounts and cashiering--we were successfully competing for na-
tional corporate business. Companies like McDonald's, UPS, AMOCO, Sandoz,
Nalco, Bunker-Ramo, and ABC had relationships with us. Despite our modest
size, we had a national calling program, targeting Fortune 1000 companies with
a local presence. But, even though we had an exceptional ability to raise low
cost corporate deposits through cash management services, we were having dif-
ficulty attracting quality business loans.
Some of the problem was of our own making. First, our real estate expertise
made us far more at home with commercial real estate loans than other business
loans, and, second, our work-out experience left us with a certain wariness of
commercial lending.
<TABLE>
<S> <C> <C> <C>
1986 1986 1987 1988
Bensenville Office opened. Oak brook bank and First First Oak Brook Naperville and Burr
First Oak Brook National Bank of Oak Bancshares reached Ridge Offices opened.
bancshares reached Brook combined. $296 million in assets. First Oak Brook
$273 million in assets. Bancshares reached
$325 million in assets.
</TABLE>
4
First Oak Brook Bancshares, Inc.
<PAGE>
- -------------------------------------------------------------------------------
More important, there were few traditional deals backed by hard assets,
close at hand. Oak Brook was home to larger companies too big to borrow from a
small institution like ours and smaller service companies with limited working
capital and equipment financing needs. Further, even the larger companies were
beginning to disintermediate, borrowing through direct placement of commercial
paper, rather than from large banks. Consequently, the giant Loop banks were
beginning to shift their attention to mid-sized and smaller businesses, fur-
ther stiffening competition.
We reasoned DuPage's upscale consumers offered the best target for lending
opportunities. We identified three basic retail credit needs--financing homes,
cars and retail purchases. And for the better part of the past fifteen years,
our Company has sought ways to meet those credit needs.
Homes at Last
To some extent, we were already familiar with the home financing business.
Primarily as an accommodation to the executives of companies which banked with
us as well as walk-ins, we always did some mortgage business--typically 5 year
balloon mortgages. These worked well for some DuPage customers, especially
those who, working for national companies, moved a lot. And they worked well
for us because, as medium-term loans, they gave us reasonable liquidity. The
problem was, most people wanted fixed rate 30 year mortgages.
So we began by creating and promoting two innovative mort-
gage
products. The first was a "prime rate" mortgage where cus-
tomers willing to accept an adjustable rate received a lower
rate usually given to business borrowers. It also helped us
to match our asset and liability costs. The second was a
twenty year mortgage where the rate was fixed for 5 or 7
years and thereafter varied periodically as an increment
over Treasuries. This latter was so well received, it was
rapidly copied by our competitors and has become a staple in
the industry.
19907ps logo
As the years have rolled by, we've expanded our home loan business in four
respects: First, we've been a market leader in promoting home equity lines.
Although we weren't big enough to introduce this product to the market, we of-
fered an "improved" version--that is, a home equity line at a lower rate. We
have consistently been the pricing leader, advertising home equity lines on
regional radio. By staking out this position, we have enhanced our pro-con-
sumer image in the minds of many Chicagoans.
Second, by the late 1980's, we began a vertical integration of our home
lending business. We reasoned that if we financed the end product, we also
ought to finance its development and construction. One consequence of the sav-
ings and loan crisis of the 1980's and the real estate recession towards the
end of that decade was that many thrifts and banks retreated from subdivision
financing. This gave us a clear path to a very selective group of local
homebuilders. We have been well-received in this niche market.
Third, we were able to begin selling long term mortgages thanks to the rapid
development of the "secondary" mortgage market. Because most of our funding
sources are shorter-term, we were natu-
<TABLE>
<CAPTION>
1989 1990 1991 1992
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First Oak Brook Glenview Office opened. Oak Brook Bank moved First Oak Brook
Bancshares acquired First Oak Brook into new corporate head- Bancshares reached
Liberty Bancorp. Bancshares reached quarters. First Oak Brook $514 million in assets.
($50 million in assets) $451 million in assets. Bancshares had $460
Total assets reached million in assets.
$409 million.
</TABLE>
5
First Oak Brook Bancshares, Inc.
<PAGE>
To Our Shareholders
- -------------------------------------------------------------------------------
[CHART APPEARS HERE]
rally averse to making longer-term home loans, at first. However, over the
last fifteen years, Fannie Mae, Freddie Mac and the Federal Home Loan Banks
have created a ready public market for government guaranteed mortgage debt.
Wholesale mortgage conduits have provided us with an avenue to participate in
this gigantic long-term mortgage market. We now can advertise the availability
of 30 year mortgages and originate and underwrite these loans for resale to
investors--a fee-generating business which complements the medium-term mort-
gages we retain in our own portfolio.
Fourth, analyzing the success of private mortgage companies like Country-
wide, we noted they had developed a distribution system very different from
most banks and thrifts.
Don't Kill the Cow and Other Valuable Lessons
While our lenders sat behind desks waiting for mortgage customers, these new
competitors sent "mortgage originators" to the homes and offices of prospects.
In effect, we processed and they sold. Our people worked on fixed salary, so
the more business which came through the door, the more ornery our processors
turned. Their originators were on commission, so the more business they gener-
ated, the jollier they became. We combined origination and processing; they
separated them. It was obvious to us that we needed to copy this new paradigm.
And we did.
As a result, there were radical changes throughout our company. Previously,
we had taken pride--some would say hubris--in rarely making a mistake. We were
a pre-eminent processing organization. (Occasionally, we recognized our exag-
gerated emphasis on process. One of our personal bankers regularly bragged to
depositors how thoroughly we investigated their backgrounds before we allowed
them to open accounts. After several potential depositors reacted negatively
to what they perceived as an invasion of privacy--after all, they were lending
us their money, not the other way around--we introduced a course in our train-
ing program called "Don't kill the cow." The message, of course, was, very few
of us would order a steak at a restaurant if the waiter butchered the steer at
our table.)
But now we had learned a very important lesson from the mortgage companies.
To the extent possible, we would separate marketing from processing. Today, we
have four mortgage originators, fourteen commercial bankers, and two invest-
ment management officers devoted exclusively to sales. Twenty-six other offi-
cers--ten business and commercial real estate lenders, eleven branch managers,
and five trust officers--divide their time between sales and service. The
transformation in our culture has been remarkable. Even our processors--in
areas like mortgages, home equities, indirect auto lending, commercial lend-
ing, personal banking and the call center--see their jobs today as sales sup-
port and service. Three former retail bankers, recognizing the status and in-
centives available in marketing, asked to join our sales team; that would have
never happened ten years ago. Selling has become a valued part of our culture.
And we try to make processing transparent to our customers.
Deals on Wheels
Strategic planning also led us to another opportunity in retail lending--car
loans. Although banks had always played an important role in financing Ameri-
ca's love affair with the automobile, by the early 1980's finance companies
belonging to the huge car manufacturers--GMAC, Ford Motor Credit and Chrysler
Credit--had captured much of the business. They had two advantages: (1) they
could subsidize lower loan rates with higher car prices, and (2) they offered
their loans directly through dealers so
<TABLE>
<CAPTION>
1993 1994 1995 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First Oak Brook Our banks are consolidated First Oak Brook First Oak Brook
Bancshares had $614 into one--Oak Brook Bank. Bancshares reached Bancshares reached
million in assets. ($634 million in assets) $678 million in assets. $768 million in assets.
</TABLE>
6
First Oak Brook Bancshares, Inc.
<PAGE>
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customers didn't have to visit a bank. Nevertheless, a few banks in Chicago-
land--namely, Lakeshore and Citizens Bank of Park Ridge and National Boule-
vard--ran successful "indirect" programs whereby
dealers initiated consumer auto loans and discounted them to
the banks. So we decided to follow their lead. We identified
high-end foreign car dealers as our potential target market,
again taking advantage of our low cost sources of funds to
underprice the competition. Because this is a specialized
business,
we recruited a very experienced underwriter from National
Boulevard to write
a business plan and start our indirect lending. Then as now,
central to our plan was to compete only on rate, not cut our
high credit standards. Today, low price, quick turnarounds,
and consistent buying practices are the hallmark of this
sector of our loan portfolio. In 1998 we purchased $123 mil-
lion in dealer
paper, while incurring losses of just $31,000. We became the fifth largest
bank originator of new car loans in Chicagoland.
Having vertically integrated residential lending, we've recently turned our
attention to doing the same with our auto dealers. Approximately, 30% of the
Chicago area new car dealers are signed up for our "indirect" program. With
penetration that deep, it was natural for us to aim at obtaining a full bank-
ing relationship. We now actively sell cash management, merchant credit card
business, commercial mortgages, and "floor plan" inventory loans to dealers.
[PERSONAL LOANS LOGO]
The Word is Plastic
Lastly, we planned to finance retail purchases. This meant entering the
credit card business. The mid 1980's was an opportune time because most
Visa(R) & Mastercard(R) issuers were charging 19.8% APR's and had just intro-
duced $18 to $20 annual fees. The exception was Jerry Bradshaw's Gary-Wheaton
Bank, by then our largest competitor in DuPage County. Jerry had launched a
regular Visa card with an 18% APR and no annual fee, and his promotion was go-
ing gangbusters. We decided to better his offering by introducing an upscale
Gold Mastercard with a 15.6% APR and no annual fee. Almost overnight, because
of great word of mouth and publicity in national consumer publications, our
card turned into a success. Soon, we were partnering with organizations like
Northwestern University, the Chicago Bar Association, the Illinois CPA Socie-
ty, and the American Veterinary Medicine Association to develop "affinity"
card programs. As with our other consumer loan programs, our plan was to be
the low-rate provider while maintaining the highest credit standards. Our
losses were, year-in and year-out, consistently a fraction of the national av-
erage.
Eventually, market forces overwhelmed us. Although we built a very profit-
able $55 million portfolio, by late 1996 growth was hard to come by. Huge is-
suers were offering below cost teaser rates--sometimes as low as 2.9% APR--to
attract new individual cardholders, and they were paying enormous guaranteed
fees and revenue-sharing arrangements to attract new affinity groups. Our low-
rate position in the market became irrelevant. So, in mid-1997 we sold our
portfolio at what we believe to be one of the highest premiums in history. Our
high credit quality standards paid-off handsomely.
Going Public
By 1985, our growth was already exceeding our capacity to generate internal
capital to support it. Our original investors' capital had been tied up for
over ten years. And we needed additional capital to fund potential bank acqui-
sitions. What we needed was a public offering of shares to provide funds for
future growth or acquisitions and liquidity for our investors. With the sup-
port of Blunt, Ellis & Loewi
<TABLE>
<CAPTION>
1997 1998 1998 1999
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First Oak Brook Aurora and Glen Ellyn First Oak Brook La Grange Office opens
Bancshares reached Offices opened. Bancshares reached in the Fall.
$816 million in assets. $1 billion in assets.
</TABLE>
7
First Oak Brook Bancshares, Inc.
<PAGE>
To Our Shareholders
- -------------------------------------------------------------------------------
(now Everen), we raised $5.5 million by issuing shares of a new class of
stock, Class A Common. Class A shares paid 120% of the Common stock's dividend
but had only 1/20th of its vote. Existing Common was convertible one for one
into Class A. By virtue of this structure, the founding families retained ef-
fective control of the Company and, more important, met the requirements of
the Management Interlocks Act which permitted common officers and director-
ships only between banks which shared common voting control. This two-class
structure solved the problem of affiliation between First Oak Brook
Bancshares, Inc. and our two independent Chicago banks.
With public ownership and a listing on the NASDAQ National Market System
came certain burdens. Previously, we could justify expansion even if it re-
duced current earnings. After we went public, we always had to weigh growth
against profit. Nevertheless, we tried our best not to manage earnings quarter
by quarter, as some larger companies were accused of doing.
Branching Out
Our growth and acquisition strategy in the latter half of the 1980's is a
case in point. As we were raising capital, others like us were following suit.
The ready supply of equity money and the ease of acquisitions due to the new
holding company structure were driving bank acquisition prices skyward. As
part of our strategic planning, we concluded branching would be the best way
to satisfy our appetite for expansion without stretching our capital and human
resources. Thus, beginning in 1985 we have opened seven branches.
And we chose to make acquisitions opportunistically. In 1989, an opportunity
presented itself to satisfy our champagne tastes on our beer budget: the $50
million asset Liberty Bank in Broadview became available for $4.75 million, or
about 1.6 times book value. While the purchase diminished earnings for that
year, it helped fill in our western suburban market.
Lockbox, Safe Deposit Box, What's the Difference?
Even as we expanded into new locations and worked at retail lending, we al-
ways built on our traditional strengths in cash management and commercial real
estate lending. Our cash management business began in the early 1970's when
the industry was in its infancy. At the time our only business development of-
ficer happened to be calling on Bunker-Ramo, a large Oak Brook headquartered
business machine manufacturer. Our calling officer offered the company our le-
gal lending limit, then about $500,000. Bunker-Ramo's treasurer explained he
was looking for $50 million. When our Vice President persisted, looking for
some service we could render, Bunker's treasurer asked if we offered lockbox
services. Our Vice President said, "Yes, of course," thinking he meant a safe
deposit box. When our officer repeated his conversation to our Cashier back at
the bank, he immediately set him straight: Lockbox originated as a way for
banks to control collection of a secured borrower's accounts receivable; the
payments, although addressed to the borrower, came directly to the bank's
post-office box for immediate bank processing. Lately, our Cashier explained,
large non-borrowing companies were adapting this device to speed collection
and improve controls, since receivables by-passed the company. Shortly, along
with a few Loop banks, we found ourselves among the cash management pioneers.
Within a few years, cash management had become ingrained in our culture from
top to bottom. Over twenty years ago, a Japanese electronics manufacturer with
a warehouse in Elmhurst called us about our lockbox capabilities. Our opera-
tor, the caller told us later, was the only one from any suburban bank who did
not transfer his call to the safe-deposit vault, but instead forwarded it di-
rectly to Deposit Operations.
8
First Oak Brook Bancshares, Inc.
<PAGE>
- -------------------------------------------------------------------------------
Taking Cash Management to the Middle Market
Like any innovation, cash management evolved over the years. When we began,
we had to show treasurers of Fortune 1000 companies how to take advantage of
the new systems. Before long, large corporations were staffed with expert
banking managers to bid out the business and seek the best "penny prices." By
the early 1980's, other large community banks jumped on the bandwagon, al-
though typically they trailed us badly in know-how. During this period the
President of Elmhurst National Bank asked for our help in pricing a lockbox
account. We told him we were uncomfortable recommending how to price his serv-
ice, but offered to tell him whether at the price he wanted to charge, his
bank would likely earn a profit. When he said 75c an item, we readily admitted
Elmhurst would make money. We didn't tell him his proposed charge was about
twice the going rate.
Seeing the growing expertise and sharper pencils within the big corporations
and entry of community banks into the market, we redirected our sales efforts
toward middle market businesses. These companies were typically solicited by
credit-driven calling officers with little knowledge of the benefits of cash
management. We were the first to identify this underserved market segment. To-
day, many of our commercial bankers devote themselves exclusively to calling
on this sector.
Meantime, while we fine-tuned our target market, we also improved our prod-
uct. Two examples show how inventive we can be. Oak Brook Bank was the first
bank in the country to provide Electronic Data Interchange (EDI) to a State
government. Working with the State of Illinois, we created a new system: as
businesses remitted their tax payments to Illinois's lockbox at our Bank, we
simultaneously captured non-financial information off the remittance stubs and
relayed it to the State by computer link.
More recently, Oak Brook Bank was one of the first six banks in the United
States and the first in the Midwest to provide electronic business banking se-
curely over the Internet. Our product--developed by us and called WEBS (Web
Electronic Banking Service)--lets businesses look in real time at their bank-
ing activity and initiate transactions on their PC's. Customers no longer have
to load special software. They no longer need special workstations and operat-
ing systems, complex installation and training, or replacement disks and rein-
stallation for every update. What an improvement!
What sets our cash management apart, however, is our willingness and ability
to customize. Our Commercial Bankers, Cash Managers, and Information Technol-
ogy experts regularly tailor products to suit individual clients. Recently, a
real property management organization asked us for a system that could apply
condo assessments collected from multiple properties to specific association
bank accounts; we developed a unique program for this purpose.
Still Doing What We Know Best
Our commercial real estate lending activities also have deep roots. Gene
Heytow and many of our directors and original investors started out in real
estate, construction, and architectural and engineering businesses. Gene had
developed a chain of motels and built a number of apartments. Myron Shapiro
and the Ecker family owned the largest painting and drywall company in Ameri-
ca. Wil Erickson ran a
suburban general contracting business. Bill Gahlberg managed
Oak Brook
Development, the joint venture of Del Webb Corp and the But-
ler family which developed Oak Brook. Sidney Epstein chaired
A. Epstein & Sons International, one of the Midwest's largest
and oldest architectural and engineering firms. Bob Footlik
headed Footlik Associates, a consulting business which spe-
cial-ized in materials handling design for new plants and
warehouses. With ready experts like these, we had exceptional
know-how to draw upon to help us manage real estate lending
risk.
[COMM'CL MORTG LOGO]
9
First Oak Brook Bancshares, Inc.
<PAGE>
To Our Shareholders
- -------------------------------------------------------------------------------
But for many years we found it difficult to coordinate our commercial real
estate lending. Within our holding company structure, we still awkwardly oper-
ated a number of separately chartered banks. A change began in 1986 when we
merged Oak Brook Bank and First National Bank of Oak Brook to form Oak Brook
Bank and culminated in 1994 when, driven by regulatory burden, we consolidated
the last of our separate banks into Oak Brook Bank.
Even before then, it was clear our commercial real estate lending needed to
be centralized, so, in January, 1992, we formed our Commercial Real Estate
Loan Department. While industry specialization is nothing new to money center
banks, typically suburban banks only assigned lenders to consumer, residential
mortgage, and commercial divisions. Now, with a marketing focus on home build-
ers and construction lending backed by a solid general knowledge of most as-
pects of Chicago commercial real estate, we were in a position to grow this
sector. And grow it we did. From a portfolio of $34 million in January, 1992,
we steadily expanded our outstandings to $156 million by year-end 1998.
Making Money Managing Money
The next strategic challenge we tackled was our Trust Department. Essential-
ly, it served merely as an accommodation. We helped customers with whatever
they needed--from securities custody and self-directed IRA accounts to escrows
and estate settlements. As recently as ten years ago, Oak Brook Bank managed
investments of just $3.2 million. Then about seven years ago, we conducted a
strategic review
of the Trust Department. Our conclusion was
that we should
direct our efforts to growing our investment
management business. While we would continue to
accommodate other customer requests, we should
seek money management business, balancing the
high variable costs of transaction processing
with the lower fixed costs of rendering invest-
ment advice.
Consequently, we introduced new investment products like our Managed Mutual
Fund Account, essentially a wrap account which gives smaller investors the
benefit of our market knowledge and custodial and administrative strengths. We
brought in two full-time business development officers, one to focus on munic-
ipal police and fire retirement funds and the other personal investment man-
agement. And, with new leadership and a new name, the Investment Management
and Trust Department, we reorganized the group into four divisions--Invest-
ments, Administration, Operations, and Business Development.
[FIRST OAK BROOK DISCRE. ASSET LOGO]
Our results speak for themselves. Assets under management have risen tenfold
from $21.2 million at the beginning of 1992 to $194.9 million at year end
1998. Fee income has more than tripled--from $324,000 for 1992 to $1,048,000
for 1998.
Our Newest Frontier
If, however, there was one area we lagged in, it was in commercial and in-
dustrial lending. As previously discussed, we began in the 1970's by turning
around troubled banks; it taught us to be conservative. Also, the center of
our market, Oak Brook, the commercial and retail capital of DuPage County, was
populated with Fortune 1000 companies and service industries--terrific deposit
generators,
but less desirable loan prospects for a smaller bank. But our biggest limita-
tion was our processing mentality. When we arrived in DuPage twenty-five years
ago, business borrowers came to their bankers' desks to petition for loans,
and bankers analyzed the requests, often scaling them back a few bucks just to
emphasize our superior power. Twice--between the mid 1970's and early 1980's--
we had credit crunches that made loans hard to get. Borrowers were grateful
just to receive an audience. Today, the
10
First Oak Brook Bancshares, Inc.
<PAGE>
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circumstances are reversed. Credit is plentiful and
cheap. Borrowers expect lenders to call upon them, and
when we do, too often they pit us against one another to
obtain the lowest price, longest maturity, and loosest
terms. The fact is, we didn't change fast enough with the
times; until recently we staffed our Commercial Lending
Department with too many "minders" and not enough "find-
ers." About two years ago, again thanks to our planning
efforts, we decided to modernize our commercial lending
attitudes. We brought in new leadership and several new
loan officers who have been effective in the market. Con-
sequently, our commercial loans rose to $108.7
million at year-end 1998 from $54.7 million at year-end 1997, essentially dou-
bling.
Investment analysts have very properly raised the question, how does this
commercial lending initiative square with our historically strong credit cul-
ture? They remind us that in the last twenty-five years, except for losses
taken on loans extended by prior managements of banks we acquired, we incurred
only one commercial loan loss of any size--for $150,000. Our answer is, we ex-
pect to have some more exposure. Therefore, we are increasing our monthly pro-
vision for losses. But we are confident the higher yields on these commercial
loans versus alternative investment opportunities will more than make up for
any losses incurred. Moreover, we're tightening our loan underwriting and ad-
ministration. We added a Small Loan Committee to scrutinize smaller business
credits, have established a Credit Administration Division within the Commer-
cial Lending Department to support our lenders and follow our growing portfo-
lio, and have enhanced our training with a "Credit Boot Camp" which all line
lenders and commercial business developers are required to attend. All our
credit training focuses on four practices: exercising extraordinary due dili-
gence and investigating sufficiently to unearth what the borrower may not know
himself or has failed to share with us; sticking to conventional loan struc-
tures and conservative advance levels; monitoring existing loans closely; and,
when problems arise, alerting senior management immediately in order to pro-
tect the bank.
Deliverance
Perhaps over the last quarter century no aspect of banking has changed more
than retail banking. In 1974, every bank in Illinois was separately chartered,
branches were severely restricted, and drive-in banking was still new. Most
banks stayed open late on Friday nights to cash workers' weekly paychecks. But
today, with the modernization of our banking laws, extensive branch networks
have developed. Alternative distribution channels--like ATM networks and on-
line banking--have proliferated, and paperless electronic payment mechanisms--
like direct deposit of salaries and social security payments, automated debits
for insurance premiums, utility bills and mortgages, and, of course, credit
and debit cards--are routine.
The challenge for our company has been to blend these delivery systems into
an optimally-efficient, customer-friendly whole--to balance the high-touch
with the high-tech. We think we can do it by addressing four issues:
1. Display a dominant physical presence in our core market, the western sub-
urbs of Chicago. Thus, we acquired banks in Addison (1974), Oak Brook (1976
and 1977), Warrenville (1983), and Broadview (1989), and opened branches in
Lisle (1985), Bensenville (1986), and Burr Ridge and Naperville (1988). For
several years, we relaxed our western suburban branching strategy while we
opened our first office on the Northshore in Glenview (1990), built our new
corporate headquarters in Oak Brook (1991), and merged into one bank charter
under the Oak Brook Bank banner (1994). In this way we were able to test our
market acceptance outside the western suburbs, centralize our back office, and
sharpen brand- awareness under the "Oak Brook Bank" banner. Then we resumed
our western suburban expansion in
11
First Oak Brook Bancshares, Inc.
<PAGE>
To Our Shareholders
- -------------------------------------------------------------------------------
1998, opening two new branches--one in Aurora in far western DuPage County and
another in Glen Ellyn in central DuPage. In addition, in 1998 we purchased a
branch site in LaGrange, Illinois which should open in late 1999.
While our branches are not all the same, generally they have several common
features. They can operate with as few as five employees--a branch manager who
works mostly inside but also participates actively in community and civic af-
fairs, an assistant branch manager/personal banker, two customer service reps
who handle new accounts and deliver teller services, and a commercial banker
to sell business services. Our intent is for retail activity to cover branch
overhead and commercial activity to render the branch profitable.
2. Use advertising wisely. Unlike some of our largest competitors who fre-
quently, and in our opinion, mostly futilely, spend large sums on image adver-
tising, we have primarily and consistently used our advertising to sell retail
products at attractive prices. This approach has advantages: we promote our
identity (e.g., in a 60-second radio spot we mention the "Oak Brook Bank" name
at least six times) while linking our name with a pro-consumer product, say, a
low-cost home equity loan or a premium-rate CD. Our two-pronged ads, unlike
purely image ads, can be evaluated according to consumer response. Meanwhile,
our business bankers--who must market Oak Brook Bank face to face-- still ben-
efit indirectly from the heightened name recognition and good product offer-
ings, since business people correctly infer that if we're fair to consumers,
we're likely to be fair to them.
Also, our radio commercials use real Oak Brook bankers to tell our story.
This suggests to the listener that he or she already has a friend at Oak Brook
Bank, in contrast to the impersonal megabanks.
3. Harness technology to serve our retail customers. Currently, our custom-
ers can bank at the branch in person or outside most branches at a drive-up
window; at one of our own or a networked ATM; at a point of sale with our
debit card; over the phone with our 24 hour voice response unit or extended-
hour Call Center; by mail; and, starting just recently, over the Internet with
OnLine Banking and bill payment. And, if a consumer wants a mortgage, we'll
come to his or her home or office.
Such a multiplicity offers improved efficiency for our bank and greater con-
venience for our customers. But it comes at a price. First, compared to twen-
ty-five years ago, we need even better educated, better trained, and more tal-
ented people to manage the technology and to handle out-of-the ordinary trans-
actions. Without a doubt, our single greatest challenge is attracting, train-
ing and retaining the right staff. Second, this technology isn't cheap. Al-
though hardware prices keep dropping, with our growth we require more and more
of it; and, as a rule, it becomes obsolete very rapidly. Software purchases
themselves can be costly; but there are also the hidden costs of annual li-
censing, maintenance, and upgrades. And who expected the Y2K problem? Technol-
ogy, in short, is a mixed blessing.
4. Create a stronger retail sales culture. We've proven in the commercial
banking and retail lending areas that we can build a strong sales culture, and
we believe we have many of the components in place to extend this throughout
retail banking. We have already installed a system that tiers retail customer
relationships by profitability. Our personal bankers receive regular training
both on our products and on how to sell them, paying special attention to what
our customers need. And, in January, 1999, we brought back Sue Peterson to
lead our Retail Banking Department. Sue, a former university consumer econom-
ics professor who started her banking career with us, had spent the last
eleven years successfully building retail sales and marketing for a $1.8 bil-
lion asset southside bank group.
We are particularly optimistic that we can develop a sales culture in our
branches because we already have an exceptional commitment to service. In a
survey we recently commissioned, our retail
12
First Oak Brook Bancshares, Inc.
<PAGE>
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bankers earned very high marks for providing top service. Management must now
show our retail bankers that needs-based selling is a part of good service,
not at odds with it.
The Bottom Line
In 1998, First Oak Brook Bancshares had remarkable balance sheet growth over
prior year end. Assets rose 24%, loans were up 41%, and demand deposits in-
creased 22%. Our core earnings, excluding
the gain from sale of our credit card
portfolio in 1997, were up 9% to
$9,441,000 in 1998. Our cash dividends
on our Class A Common jumped 28%, and we
declared a 2 for 1 stock split in 1998.
But as happy as these one year results
make us, our satisfaction comes from
looking back a quarter-century and see-
ing how far we've come. To those of us
who've been here from the beginning--our
shareholders, customers, co-workers and
friends--thank you for your help in mak-
ing our first $1 billion a reality.
[FIRST OAK BROOK TOTAL INC LOGO]
[SIGNATURE OF [SIGNATURE OF [SIGNATURE OF
EUGENE P. HEYTOW] RICHARD M. RIESER, JR.] FRANK M. PARIS
Eugene P. Heytow Richard M. Rieser, Jr. Frank M. Paris
Chairman President Vice-Chairman
First Oak Brook Bancshares, Inc. 13
<PAGE>
Management Discussion and Analysis
- --------------------------------------------------------------------------------
Earnings Summary and Selected Consolidated Financial Data
<TABLE>
<CAPTION>
At and for the year ended December 31,
(Dollars in thousands
except per share data) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data
Net interest income $ 28,410 $ 27,432 $ 26,834 $ 25,476 $ 24,296
Provision for loan losses 630 1,550 1,510 1,050 1,200
Net interest income after
provision for loan losses 27,780 25,882 25,324 24,426 23,096
Other income 7,991 15,541 4,647 4,186 4,098
Other expenses 22,423 20,708 20,435 19,924 19,173
Income before provision
for income taxes 13,348 20,715 9,536 8,688 8,021
Provision for income taxes 3,907 6,962 2,429 1,996 1,827
Net income $ 9,441 $ 13,753 $ 7,107 $ 6,692 $ 6,194
- -------------------------------------------------------------------------------
Per Share Data/1/
Basic earnings per share $ 1.42 $ 2.09 $ 1.06 $ 1.00 $ .92
Diluted earnings per share 1.39 2.03 1.03 .98 .91
Cash dividends paid per
share:
Class A common .345 .270 .190 .158 .138
Common .288 .220 .158 .132 .111
Book value per share 11.46 10.38 8.62 8.23 6.27
Market price per share 18.50 24.00 11.63 10.32 8.63
- -------------------------------------------------------------------------------
Year-End Balance Sheet
Data
Total assets $1,009,275 $816,144 $768,655 $678,102 $634,705
Loans, net of unearned
discount 631,987 447,332 420,164 362,728 309,681
Allowance for loan losses 4,445 4,329 4,109 3,932 3,859
Investment securities 297,674 302,098 265,954 256,192 263,943
Demand deposits 187,209 153,806 147,497 128,236 109,237
Total deposits 777,802 627,763 648,303 555,086 513,623
Federal Home Loan Bank
borrowings 57,500 42,500 -- 3,500 6,000
Shareholders' equity 77,061 71,661 59,553 53,762 42,909
- -------------------------------------------------------------------------------
Financial Ratios
Return on average assets 1.02% 1.76% .97% 1.03% 1.01%
Return on average equity 12.74 21.72 12.77 14.00 14.54
Net interest margin 3.43 3.97 4.20 4.54 4.61
Net interest spread 2.34 2.86 3.23 3.57 3.87
Dividend payout ratio 24.17 12.43 18.63 14.63 14.13
- -------------------------------------------------------------------------------
Capital Ratios
Average equity to average
total assets 8.00% 8.11% 7.59% 7.39% 6.95%
Tier 1 capital ratio 10.20 13.70 12.66 13.33 13.37
Total capital ratio 10.80 14.55 13.54 14.32 14.46
Capital leverage ratio 7.61 8.57 7.69 7.94 7.50
- -------------------------------------------------------------------------------
Asset Quality Ratios
Nonperforming loans to
total loans .04% .09% .49% .03% .21%
Nonperforming assets to
total loans and other
real estate owned .04 .09 .49 .03 .21
Nonperforming assets to
total capital .35 .53 3.49 .19 1.49
Allowance for loan losses
to total loans .70 .97 .98 1.08 1.25
Net charge-offs to average
loans .10 .32 .34 .30 .20
Allowance for loan losses
to nonperforming loans 16.34x 11.45x 1.98x 37.81x 6.05x
- -------------------------------------------------------------------------------
</TABLE>
/1/Per share data has been restated to give effect to the 100% stock dividend
declared July 21, 1998.
14
First Oak Brook Bancshares, Inc.
<PAGE>
- --------------------------------------------------------------------------------
Results of Operations
The following discussion and analysis provides information about the financial
condition and results of operations of First Oak Brook Bancshares, Inc. (the
Company) for the years ended December 31, 1998, 1997 and 1996. This discussion
and analysis should be read in conjunction with the Company's consolidated fi-
nancial statements and notes thereto included in this report.
Assets at year-end reached a record high, in excess of $1 billion, up 24% from
total assets of $816 million at December 31, 1997. Increased marketing efforts
and competitive pricing contributed to the strong asset growth.
Total equity also reached a record level of $77 million at December 31, 1998 an
increase of 8% over prior year total equity of $72 million. The Company's capi-
tal ratios continued to exceed the minimum regulatory guidelines and the sub-
sidiary bank's capital ratios exceed the minimum ratios for "well-capitalized"
banks as defined by the FDIC.
Earnings
The Company's consolidated net income, earnings per share and selected ratios
for 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $9,441,000 $13,753,000 $7,107,000
Basic earnings per share $ 1.42 $ 2.09 $ 1.06
Diluted earnings per share $ 1.39 $ 2.03 $ 1.03
Return on average assets 1.02% 1.76% .97%
Return on average equity 12.74% 21.72% 12.77%
Included in 1997 net income was the gain from the sale of the credit card port-
folio. The Company recognized an after-tax gain of $5.1 million on the sale.
The net gain consisted of a premium of $11.5 million less expenses of $2.25
million, an $800,000 special provision for loan losses and an income tax provi-
sion of $3.3 million. In addition the Company shares in the revenue from the
sold portfolio for five twelve month periods beginning July of 1997, subject to
a maximum annual payment of $900,000. Results for 1997, excluding the gain on
the sale of the credit card portfolio, were as follows:
Net income $ 8,670,000
Basic earnings per share $ 1.31
Diluted earnings per share $ 1.28
Return on average assets 1.11%
Return on average equity 13.69%
</TABLE>
1998 versus 1997
The 1998 results compared to 1997 include the following significant pre-tax
components:
. Net interest income rose $978,000 due to a 20% increase in average earning
assets, primarily loans, offset by a 14% decrease in the net interest margin.
. The provision for loan losses decreased by $920,000 primarily due to the sale
of the credit card portfolio in 1997. Since virtually all of the historical
charge-offs were related to the credit card portfolio, and the Company con-
tinued to have low levels of non-performing loans, the provision for 1998 was
reduced.
. Other income, excluding the gain on the sale of the credit card portfolio in
1997, increased $1,701,000 primarily due to an increase in fee income from
business deposit accounts, income earned from the revenue sharing agreement
on the credit card portfolio sale, merchant credit card processing, and the
net gain on mortgages sold in the secondary market.
. Other expenses increased $1,715,000 due primarily to salary and employee ben-
efit expenses as a result of bank growth, occupancy and equipment expenses
related to the two new branches opened in 1998 and merchant interchange ex-
pense. In addition, included in the 1997 other expenses was a $300,000 con-
tribution to the Oak Brook Bank Charitable Trust and a gain of $515,000 re-
corded on the sale of surplus property formerly leased to a third party.
1997 versus 1996
The 1997 results compared to 1996 include the following significant pre-tax
components:
. Net interest income rose $598,000 due to a 7% increase in average earning as-
sets offset by a 5% decrease in the net interest margin.
15
First Oak Brook Bancshares, Inc.
<PAGE>
Management Discussion and Analysis
- --------------------------------------------------------------------------------
. Other income, excluding the gain on the credit card portfolio sale, increased
$1,643,000 primarily due to income earned from the revenue sharing agreement
on the sold credit card portfolio, as well as higher fees from business de-
posit accounts, investment management and trust accounts, and merchant card
processing.
. Salaries and employee benefits increased $527,000 due to normal salary in-
creases, higher compensation due to competitive market conditions, additional
upgrades and increased staff in core growth areas, offset by the elimination
of salaries in the credit card department due to the sale of the credit card
portfolio.
. Data processing fees decreased $324,000 primarily due to the sale of the
credit card portfolio.
. Included in other operating expense was a $300,000 contribution made to Oak
Brook Bank Charitable Trust established in December, 1997.
. Included in other operating expense was a $515,000 gain on the sale of sur-
plus property formerly leased to a third party.
Net Interest Income
Net interest income is the difference between interest earned on loans, invest-
ments and other earning assets and interest paid on deposits and other inter-
est-bearing liabilities. Net interest income is the principal source of the
Company's revenues.
1998 versus 1997
On a tax-equivalent basis, net interest income for 1998 totaled $29,589,000, an
increase of $998,000 or 4% over 1997. This increase is attributable to a 20%
increase in average earning assets offset by a 14% decrease in the net interest
margin to 3.43% in 1998 from 3.97% in 1997. The compression of the net interest
margin was a result of the following:
. The composition of average assets changed during 1997 and continued to change
into 1998. During 1997, the Company sold its high-yielding credit card port-
folio and reinvested those funds in the securities market at an approximate
yield of 7%. During 1998, average loans increased $104 million primarily in
the indirect auto ($56 million), commercial ($29 million), commercial real
estate ($26 million), residential real estate ($13 million) and home equity
($8 million) loan portfolios offset by a decrease in the credit card portfo-
lio ($27 million). Further compression of the loan yields was due to the com-
petitive pricing as well as the slight decrease in the average prime rate to
8.35% in 1998 from 8.44% in 1997.
. While rates paid on the individual components of interest-bearing liabilities
dropped, the overall cost of interest-bearing liabilities increased from
4.89% in 1997 to 4.95% in 1998. This increase was primarily due to increased
volume of the higher-cost interest-bearing liabilities, primarily time depos-
its and FHLB borrowings. The average time deposit balance increased $69 mil-
lion. The average balance of FHLB borrowings increased $42 million at a long-
term average rate of 5.80%.
1997 versus 1996
On a tax-equivalent basis, net interest income for 1997 totaled $28,591,000, an
increase of $438,000 or 2% over 1996. This increase is attributable to a 7% in-
crease in average earning assets offset by a 5% decrease in the net interest
margin to 3.97% in 1997 from 4.20% in 1996. The compression of the net interest
margin was a result of the following:
. On June 30, 1997, the Company sold its credit card portfolio which totaled
approximately $53 million and had a gross yield of approximately 16%. The net
proceeds from the sale of approximately $58 million were reinvested in the
bank's securities portfolio at an approximate yield of 7%. While the interest
income stream combined with the future revenue sharing payments and reduced
expenses associated with the sale had a neutral to slightly positive effect
on earnings, the net interest margin was compressed for the second six months
of 1997.
. Further compression of the net interest margin in 1997 was offset by a slight
increase in the average prime rate to 8.44% in 1997 from 8.27% in 1996 and
growth in average loan volume. Average loans increased $24 million primarily
in indirect auto loans ($30 million), home equity loans ($9.4 million) and
commercial loans ($9.4 million), offset by a drop in credit card loans ($27.2
million).
. The average cost of interest-bearing liabilities rose to 4.89% in 1997 from
4.80% in 1996. The 1997 average balance of higher rate time deposits in-
creased $21.2 million compared to 1996, while the 1997 average balance of
lower rate savings and NOW accounts declined $13.7 million compared to 1996.
To fund the loan growth at lower rates than it would have had to pay on de-
posits, the Company increased its average Federal Home Loan Bank borrowings
by $12.6 million in 1997.
16
First Oak Brook Bancshares, Inc.
<PAGE>
- --------------------------------------------------------------------------------
The following table presents the average interest rate on each major category
of interest-earning assets and interest-bearing liabilities for 1998, 1997, and
1996.
Average Balances and Effective Interest Rates
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ------------------------- -------------------------
Interest Interest Interest
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 and
securities purchased
under agreements to
resell $ 38,904 $ 2,106 5.41% $ 8,325 $ 460 5.52% $ 17,679 $ 943 5.33%
Interest-bearing
deposits with banks 11,230 764 6.81 5,260 362 6.89 250 13 5.20
Taxable securities 240,674 15,489 6.44 243,341 15,090 6.20 208,546 12,551 6.02
Tax exempt
securities/1/ 50,197 3,567 7.11 46,638 3,489 7.48 51,101 3,956 7.74
Loans, net of unearned
discount/1/,/2/ 521,072 40,949 7.86 416,758 36,445 8.75 392,572 36,328 9.25
- ---------------------------------------------------------------------------------------------------------
Total earning assets/
interest income $862,077 $62,875 7.29% $720,322 $55,846 7.75% $670,148 $53,791 8.03%
- ---------------------------------------------------------------------------------------------------------
Cash and due from banks 40,081 39,611 41,738
Other assets 28,379 25,237 25,013
Allowance for loan
losses (4,092) (4,431) (4,139)
- ---------------------------------------------------------------------------------------------------------
$926,445 $780,739 $732,760
- ---------------------------------------------------------------------------------------------------------
Liabilities and
Shareholders' Equity
Interest-bearing
liabilities:
Savings and NOW
accounts $171,067 $ 5,711 3.34% $172,533 $ 6,159 3.57% $186,195 $ 6,852 3.68%
Money market accounts 40,139 1,302 3.24 34,071 1,089 3.20 29,865 900 3.01
Time deposits 346,807 20,016 5.77 277,727 16,125 5.81 256,520 14,786 5.76
Short-term debt 59,110 3,014 5.10 59,881 3,101 5.18 60,753 3,058 5.03
FHLB borrowings 55,917 3,243 5.80 13,438 781 5.82 870 42 4.83
- ---------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities/interest
expense $673,040 $33,286 4.95% $557,650 $27,255 4.89% $534,203 $25,638 4.80%
Demand deposits 170,146 151,257 136,866
Other liabilities 9,159 8,523 6,052
- ---------------------------------------------------------------------------------------------------------
Total liabilities $852,345 $717,430 $677,121
Shareholders' equity 74,100 63,309 55,639
- ---------------------------------------------------------------------------------------------------------
$926,445 $780,739 $732,760
- ---------------------------------------------------------------------------------------------------------
Net interest income/net
interest spread/3/ $29,589 2.34% $28,591 2.86% $28,153 3.23%
Net interest margin/4/ 3.43% 3.97% 4.20%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
/1/Tax equivalent basis. Interest income and average yield on tax exempt loans
and investment securities include the effects of tax equivalent adjustments us-
ing a tax rate of 35% in 1998 and 1997 and 34% in 1996.
/2/Includes nonaccrual loans.
/3/Total yield on average earning assets, less total rate paid on average in-
terest-bearing liabilities.
/4/Total interest income, tax equivalent basis, less total interest expense,
divided by average earning assets.
17
First Oak Brook Bancshares, Inc.
<PAGE>
Management Discussion and Analysis
- --------------------------------------------------------------------------------
The following table presents a summary analysis of changes in interest income
and interest expense for 1998 as compared to 1997 and 1997 as compared to 1996.
Interest income rose in 1998 due to the higher volume of loans and federal
funds sold offset by a decline in average loan yields. Interest expense rose in
1998 due to the increased volume of time deposits and Federal Home Loan Bank
borrowings offset by a decrease in rates paid. The increase in net interest in-
come in 1997 was due to the increased volume of loans and securities offset by
a decline in average loan yields due to the sale of the credit card portfolio.
Analysis of Net Interest Income Changes
<TABLE>
<CAPTION>
1998 Over 1997 1997 Over 1996
------------------------- -------------------------
(Dollars in thousands) 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 $ 1,656 $ (10) $1,646 $ (516) $ 33 $ (483)
Interest-bearing
deposits with banks 407 (5) 402 344 5 349
Taxable securities (166) 565 399 2,148 391 2,539
Tax exempt securities/2/ 258 (180) 78 (337) (130) (467)
Loans, net of unearned
discount/2/,/3/ 8,464 (3,960) 4,504 2,173 (2,056) 117
- -------------------------------------------------------------------------------
Total interest income $10,619 $(3,590) $7,029 $3,812 $(1,757) $2,055
- -------------------------------------------------------------------------------
Increase (decrease) in
interest expense:
Savings & NOW accounts $ (52) $ (396) $ (448) $ (492) $ (201) $ (693)
Money market accounts 197 16 213 132 57 189
Time deposits 3,988 (97) 3,891 1,230 109 1,339
Short-term debt (40) (47) (87) (44) 87 43
FHLB borrowings 2,464 (2) 2,462 729 10 739
- -------------------------------------------------------------------------------
Total interest expense $ 6,557 $ (526) $6,031 $1,555 $ 62 $1,617
- -------------------------------------------------------------------------------
Increase (decrease) in
net interest income $ 4,062 $(3,064) $ 998 $2,257 $(1,819) $ 438
- -------------------------------------------------------------------------------
</TABLE>
/1/The change in interest due to both rate and volume has been allocated pro-
portionately.
/2/Tax equivalent basis. Tax exempt loans and investment securities include the
effects of tax equivalent adjustments using a tax rate of 35% in 1998 and 1997
and 34% in 1996.
/3/Includes nonaccrual loans.
Allowance and Provision for Loan Losses
Loans which are determined to be uncollectible are charged off against the al-
lowance for loan losses and recoveries of loans that were previously charged
off are credited to the allowance.
The Company's charge-off policy varies with respect to the category of and spe-
cific circumstances surrounding each loan under consideration. The Company's
policy with respect to commercial, real estate, indirect auto and other loans
is to charge-off on the basis of management's ongoing evaluation of
collectibility. In the past, with respect to credit card loans, charge-offs
were made on all such loans when they were deemed to be uncollectible or when
180 days past due, whichever came first. In addition, any loans which are clas-
sified as "loss" in regulatory examinations are charged off.
18
First Oak Brook Bancshares, Inc.
<PAGE>
- --------------------------------------------------------------------------------
The following table summarizes the loan loss experience for each of the last
five years.
Summary of Loan Loss Experience
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans for the
period, net of unearned
discount and allowance for
loan losses $516,980 $412,327 $388,433 $321,183 $280,648
- ------------------------------------------------------------------------------
Allowance for loan losses,
beginning of period $ 4,329 $ 4,109 $ 3,932 $ 3,859 $ 3,231
Charge-offs for period:
Real estate-construction -- (200) -- -- --
Real estate mortgage and
home equity loans -- (20) -- -- --
Commercial loans -- -- -- -- (25)
Indirect auto loans (31) (39) (14) (3) (2)
Credit card loans (188) (1,237) (1,484) (1,096) (702)
Overdraft loans (458) (4) (11) (3) --
Consumer loans (52) (5) (2) (10) (6)
- ------------------------------------------------------------------------------
Total charge-offs (729) (1,505) (1,511) (1,112) (735)
- ------------------------------------------------------------------------------
Recoveries for period:
Real estate mortgage and
home equity loans -- -- -- -- 35
Commercial loans 11 1 33 41 52
Indirect auto loans 20 8 11 -- --
Credit card loans 181 166 126 81 63
Overdraft loans 1 -- -- -- --
Consumer loans 2 -- 8 13 13
- ------------------------------------------------------------------------------
Total recoveries 215 175 178 135 163
- ------------------------------------------------------------------------------
Net charge-offs for the
period (514) (1,330) (1,333) (977) (572)
Provision for loan losses 630 1,550 1,510 1,050 1,200
- ------------------------------------------------------------------------------
Allowance for loan losses,
end of period $ 4,445 $ 4,329 $ 4,109 $ 3,932 $ 3,859
- ------------------------------------------------------------------------------
Ratio of net charge-offs to
average loans outstanding .10% .32% .34% .30% .20%
Allowance for loan losses
as a percent of loans
outstanding, net of
unearned discount at end
of period .70% .97% .98% 1.08% 1.25%
Ratio of allowance for loan
losses to nonperforming
loans 16.34x 11.45x 1.98x 37.81x 6.05x
- ------------------------------------------------------------------------------
</TABLE>
The provision for loan losses decreased $920,000 in 1998 as compared to 1997.
Prior to 1998, primarily all of the Company's charge-offs had been related to
the credit card portfolio. Since the credit card portfolio was sold in 1997 and
the Company continued to have very low levels of non-performing loans, manage-
ment decreased the provision in 1998.
The provision for loan losses increased $40,000 in 1997 over 1996. When the
credit card portfolio was sold in 1997, the bank retained approximately $1.3
million in outstandings, approximately one-third of which consisted of accounts
delinquent 60 days or more and the remainder of which were accounts on fixed
payment schedules. Based on a review of these accounts, management determined
that a special $800,000 provision was prudent given the discontinued credit
card operations and the inherent risks related to the remaining credit card ac-
counts.
Net charge-offs for 1998 totaled $514,000 or .10% of average loans. Of total
net charge-offs, $451,000 related to a commercial overdraft. The Company's sub-
sidiary is pursuing recovery of this charge-off in a lawsuit filed in Federal
Court for the Northern District of Illinois. The suit names a commercial cus-
tomer and a major Chicago bank as defendants. The complaint alleges the commer-
cial customer perpetrated a kiting scheme and the Chicago bank violated the re-
quirements for timely return of the subject checks imposed on it by law and
regulation.
Currently and historically, the Company has had high asset quality. Fluctua-
tions in asset quality ratios during 1997 were positively affected by a repay-
ment of $1.5 million on a nonaccrual loan of $1.7 million outstanding at Decem-
ber 31, 1996. See nonperforming assets table for historical information.
The Company's allowance for loan losses as a percent of loans outstanding was
.70% at December 31, 1998 as compared to .97% in 1997 and .98% in 1996. Manage-
ment believes the allowance for loan losses is at an adequate level.
19
First Oak Brook Bancshares, Inc.
<PAGE>
Management Discussion and Analysis
- --------------------------------------------------------------------------------
The provision for loan losses is sufficient to provide for probable loan losses
and maintain the allowance at an adequate level commensurate with management's
evaluation of the risks inherent in the loan portfolio.
Management of the subsidiary bank prepares a detailed analysis, at least quar-
terly, reviewing the adequacy of its allowance and, when appropriate, recom-
mending 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 re-
serves. The allocated segment involves primarily an estimated calculation of
losses on specific problem and management watch list loans, the remaining
credit card portfolio and delinquent consumer 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 includ-
ing unfunded commitments. In addition, the bank considers its loan growth, man-
agement 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 al-
lowance is made for analytical purposes and is not necessarily indicative of
the trend of future loan losses in any particular loan category. The total al-
lowance is available to absorb losses from any segment of the portfolio.
In order to identify potential risks in the loan portfolio and determine the
necessary provision for loan losses, detailed information is obtained from the
following sources:
. 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 third-party consultants and internal audit staff.
In addition to management's assessment of the portfolio, the Company and the
subsidiary bank are examined periodically by regulatory agencies. Although such
agencies do not determine whether the allowance for loan loss is adequate,
their examinations may result in increases to the allowance based on their
judgements about information available to them at the time of their examina-
tion.
The following table presents the allocation of the allowance for loan losses
for each of the last five years.
Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
<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 8 6 12 7 11
Commercial loans 218 34 -- -- 30
Indirect auto loans 118 32 22 52 17
Consumer loans 2 14 6 20 9
Credit card loans 213 287 324 208 88
Unallocated 3,886 3,956 3,345 3,519 3,560
- -------------------------------------------------------------------------------
Total allowance $4,445 $4,329 $4,109 $3,932 $3,859
- -------------------------------------------------------------------------------
Percentage of loans to gross loans:
Real estate--land acquisition and
construction loans 6.6% 8.2% 8.5% 7.9% 4.8%
Real estate mortgage and home equity
loans 48.2 52.6 50.5 50.6 53.3
Commercial loans 17.2 12.2 9.7 10.5 10.7
Indirect auto loans 26.1 23.7 13.9 10.8 7.6
Consumer loans 1.9 3.2 3.6 4.1 4.3
Credit card loans -- 0.1 13.8 16.1 19.3
- -------------------------------------------------------------------------------
100.0% 100.0% 100.0% 100.0% 100.0%
- -------------------------------------------------------------------------------
</TABLE>
Nonperforming Assets
The accrual of interest is discontinued on commercial and real estate loans
when the continuity of contractual principal or interest is deemed doubtful by
management or when 90 days or more past due and the loan is not well secured or
in the process of collection. Interest income is recorded on these loans only
as it is collected. Interest payments on nonaccrual loans which contain unusual
risk features or marginal collateral values may be applied directly to loan
principal for accounting purposes.
20
First Oak Brook Bancshares, Inc.
<PAGE>
- --------------------------------------------------------------------------------
The following table highlights the Company's nonperforming assets.
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccruing loans $ -- $ -- $1,730 $ -- $ 70
Loans which are past due 90 days or more 272 378 349 104 568
- -------------------------------------------------------------------------------
Total nonperforming loans 272 378 2,079 104 638
Other real estate owned -- -- -- -- --
- -------------------------------------------------------------------------------
Total nonperforming assets $272 $378 $2,079 $104 $638
- -------------------------------------------------------------------------------
Nonperforming loans to total loans outstanding .04% .09% .49% .03% .21%
Nonperforming assets to total loans
outstanding and other real estate owned .04% .09% .49% .03% .21%
Nonperforming assets to total assets .03% .05% .27% .02% .10%
Nonperforming assets to total capital .35% .53% 3.49% .19% 1.49%
- -------------------------------------------------------------------------------
</TABLE>
The Company's ratio of nonperforming loans to total loans outstanding and other
real estate owned of .04% at December 31, 1998 was below the industry peer
group ratio of .85%/1/.
Summary of Other Income
The following table summarizes significant components of other income and per-
centage changes from year to year:
<TABLE>
<CAPTION>
% Change
-----------------
(Dollars in thousands) 1998 1997 1996 '98-'97 '97-'96
- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Service charges $3,190 $ 2,730 $2,381 17% 15%
Investment management
and trust fees 1,048 1,025 653 2 57
Merchant card processing
fees 1,329 964 511 38 89
Fees on mortgages sold 416 224 131 86 71
Income from revenue
sharing agreement 900 450 -- 100 --
Other operating income 1,029 906 957 14 5
Investment securities
gains (losses) 79 (9) 14 977 (164)
Gain on sale of credit
card portfolio -- 9,251 -- -- --
- -------------------------------------------------------------------
Total $7,991 $15,541 $4,647 (49)% 234%
- -------------------------------------------------------------------
</TABLE>
1998 versus 1997
Service charges on deposit accounts increased $460,000 primarily due to an in-
crease in business account analysis fees.
Investment management and trust department income increased $23,000, primarily
due to an increase in assets under investment management and other new trust
business offset by a change in the billing cycle that took place in 1997. The
change in the billing cycle resulted in additional fee income recorded in 1997
of approximately $147,000. Absent this 1997 change, investment management and
trust income increased $170,000 in 1998 due to an increase in discretionary as-
sets under investment management to $195 million at December 31, 1998 from $134
million at December 31, 1997.
Merchant card processing fees increased $365,000 primarily due to several new
merchants and continued marketing efforts. The number of merchants serviced in-
creased to 202 at year-end 1998 from 170 at year-end 1997. Merchant interchange
expense (in the other expense section) rose $297,000 in 1998.
Fees on mortgages sold, servicing released, increased $192,000 due to increased
residential loan originations. This fee income for 1998 represents the gain on
mortgages sold of $711,000 net of $295,000 in commissions paid to the loan of-
ficers that originate the loan activity.
Income from the revenue sharing agreement increased $450,000 to $900,000 due to
the recognition of twelve months of income in 1998 compared to only six months
of income in 1997 because the credit card portfolio sale closed on June 30,
1997.
- --------------------------------------------------------------------------------
/1/Source: Seventh Federal Reserve District Bank Holding Company Performance
Report as of September, 1998, page 13, Peer Group 04, Consolidated assets be-
tween $500 million and $1 billion, consisting of 109 bank holding companies.
21
First Oak Brook Bancshares, Inc.
<PAGE>
Management Discussion and Analysis
- --------------------------------------------------------------------------------
The increase in other operating income of $123,000 was primarily attributable
to the recognition of a full year of ATM surcharge fees in 1998. This program
began in 1997 and therefore only a partial year of income was recognized.
1997 versus 1996
Service charges on deposit accounts increased $349,000 primarily due to an in-
crease in business account analysis fees.
Investment management and trust department income increased $372,000, primarily
due to an increase in assets under investment management, other new trust busi-
ness and the change in the billing cycle discussed above. Absent this change,
fee income would have increased $225,000 in 1997. Discretionary assets under
investment management grew $43 million to $134 million at December 31, 1997
from $91 million at December 31, 1996.
Merchant card processing fees increased $453,000 primarily due to several new
large volume merchants and continued marketing efforts. The number of merchants
serviced increased to 170 at year-end 1997 from 138 at year-end 1996. Merchant
interchange expense (in the other expense section) rose $386,000 in 1997.
The increase from the revenue sharing agreement of $450,000 represents a sepa-
rate component of the credit card portfolio sale which took place in June,
1997. This agreement allows for the Company to share in the income from the
sold portfolio through June of 2002 up to a maximum of $900,000 for each
twelve-month period.
The decrease in other operating income of $51,000 was principally attributable
to a decrease in rental income from the sale of the rented surplus property and
investment center fees offset by the introduction of ATM surcharge fees in July
1997.
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) 1998 1997 1996 '98-'97 '97-'96
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $13,680 $12,293 $11,766 11% 4%
Occupancy expense 1,566 1,457 1,430 7 2
Equipment expense 1,906 1,566 1,737 22 (10)
Data processing fees 776 1,301 1,625 (40) (20)
Professional fees 522 398 329 31 21
Postage, stationery and supplies 834 768 752 9 2
Advertising and business development 1,090 1,191 1,205 (8) (1)
Merchant interchange expense 994 697 311 43 124
FDIC premiums 81 78 2 4 3,800
Other operating expenses 974 959 1,278 2 (25)
- -----------------------------------------------------------------------------
Total $22,423 $20,708 $20,435 8% 1%
- -----------------------------------------------------------------------------
</TABLE>
1998 versus 1997
Other expenses rose $1,715,000 or 8% in 1998 over 1997. Salaries and employee
benefits increased $1,387,000 due to normal salary increases, a highly competi-
tive job market and increased requirements for staff in the new Aurora and Glen
Ellyn branches and other growing areas of the bank. These additional salaries
were partially offset by the elimination of salaries due to the sale of the
credit card portfolio in 1997.
Occupancy and equipment expenses increased $449,000 over 1997 due to the open-
ing of the new Aurora and Glen Ellyn branches, an upgrade to the mainframe com-
puter system, and the purchase of a new imaging system and check sorter during
1998.
Data processing fees decreased $525,000 and advertising and business develop-
ment decreased $101,000 due to the sale of the credit card portfolio in 1997.
Merchant interchange expense increased $297,000 due to new merchants and con-
tinued marketing efforts. Merchant card processing fees (in other income) rose
$365,000 in 1998.
Other operating expenses increased $15,000 primarily due to two "non-core"
items in 1997. During 1997, the Company recorded a gain on the sale of surplus
property of $515,000 which was included as a reduction of other expense. This
transaction was offset by a $300,000 contribution to the Oak Brook Bank Chari-
table Trust established in December 1997.
22
First Oak Brook Bancshares, Inc.
<PAGE>
- -------------------------------------------------------------------------------
1997 versus 1996
Other expenses rose $273,000 or 1% in 1997 over 1996. Salaries and employee
benefits increased $527,000 as a result of normal raises, higher compensation
due to competitive market conditions, additional upgrades and increased staff
in the growing areas of the bank including indirect auto, merchant card
processing and commercial departments. This increase was offset by the elimi-
nation of salaries due to the sale of the credit card portfolio.
Equipment expense decreased $171,000 primarily due to lower depreciation ex-
pense, as certain assets became fully depreciated, and due to the write off of
equipment formerly used to process the credit card portfolio.
Data processing fees decreased $324,000 primarily as a result of the disposi-
tion of the credit card portfolio.
Other operating expenses decreased $319,000 primarily due to two non "core"
items. First, the Company recognized a pre-tax gain of $515,000 on the sale of
surplus property formerly leased to McDonald's Corporation. Secondly, the Com-
pany made a pre-tax contribution of $300,000 to the Oak Brook Bank Charitable
Trust established in December, 1997.
Income Tax Expense
Income taxes for 1998 totaled $3,907,000 as compared to $6,962,000 for 1997
and $2,429,000 in 1996. When measured as a percentage of income before income
taxes, the Company's effective tax rate was 29% for 1998 compared to 34% in
1997 and 25% in 1996. The decrease in the provision for income taxes and the
effective tax rate for 1998 as compared to 1997 was due to an additional $3.3
million tax provision recorded in 1997 on the gain on the sale of the credit
card portfolio.
- -------------------------------------------------------------------------------
Financial Condition
Liquidity
Effective management of balance sheet liquidity is necessary to fund growth in
earning assets and to pay liability maturities, depositors' withdrawal re-
quirements and shareholders' dividends.
The Company has numerous sources of liquidity including a portfolio of short-
er-term assets, readily marketable investment securities, the ability to at-
tract consumer time deposits and access to various borrowing arrangements.
Available borrowing arrangements are summarized as follows:
Subsidiary Bank:
. Informal Federal funds lines aggregating $110 million with six correspondent
banks, subject to continued good financial standing. As of December 31,
1998, $64.4 million was available for use under these lines.
. Reverse repurchase agreement lines totaling $150 million with two brokerage
firms, subject to the availability of collateral and continued good finan-
cial standing. As of December 31, 1998, $43.4 million was available to the
Bank based upon the Bank's excess collateral available to pledge to these
lines.
. Additional advances from the Federal Home Loan Bank of Chicago are available
based on the pledge of specific collateral and FHLB stock ownership. As of
December 31, 1998, $10.7 million is available to the Bank under the FHLB's
"Blanket Lien" agreement whereby the Bank is required to pledge one-to-four
family residential loans. However the Bank is currently in the process of
increasing the FHLB borrowing line by delivering certain large-dollar resi-
dential loans to the FHLB which will result in an increased borrowing limit
of approximately $10 million.
. The Bank is in the process of establishing a $150 million line at the dis-
count window of the Federal Reserve Bank. This will enable the Bank to ob-
tain additional liquidity as part of the year 2000 contingency planning.
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. In ad-
dition the Company is in the process of obtaining an increase to the line.
. The parent company also had cash, short-term investments and other market-
able securities totaling $5.8 million at December 31, 1998.
23
First Oak Brook Bancshares, Inc.
<PAGE>
Management Discussion and Analysis
- --------------------------------------------------------------------------------
Interest Rate Sensitivity
Interest rate risk arises when the maturity or repricing of assets differs sig-
nificantly from the maturity or repricing of liabilities. The Company's finan-
cial results could be affected by changes in market interest rates such as the
prime rate, LIBOR and treasury yields as well as competitive rates for retail
deposit products. The objective of interest rate risk management is to provide
the maximum levels of net interest income while maintaining acceptable levels
of interest rate risk and liquidity risk. A number of measures are used to mon-
itor and manage interest rate risk, including income simulation, rate shock
analysis and interest sensitivity (gap) analysis.
An income simulation model is the primary tool used to assess the direction and
magnitude of changes in net interest income resulting from changes in interest
rates. The model incorporates management assumptions regarding the level of in-
terest rate or balance changes on indeterminate maturity deposit products
(passbook savings, money market, NOW and demand deposits) for a given level of
market rate changes. These assumptions are developed through historical analy-
sis. Additionally, changes in prepayment behavior of the mortgage related as-
sets in each rate environment are captured using estimates of prepayment speeds
for the portfolios. Other assumptions in the model include cash flows and matu-
rities of other financial instruments, changes in market conditions, loan vol-
umes and pricing, and customer preferences. These assumptions are inherently
uncertain and, as a result, the model cannot precisely estimate net interest
income or precisely predict the impact of higher or lower interest rates on net
interest income. Actual results will differ from simulated results due to tim-
ing, magnitude and frequency of interest rate changes and changes in market
conditions and management strategies, among other factors.
The Company's policy objective is to limit the change in annual net interest
income to 10% from an immediate and sustained parallel change in interest rates
(rate shock) of 200 basis points. As of December 31, 1998 and 1997, the Company
had the following estimated net interest income sensitivity profile. The impact
of planned growth and anticipated new business activities is not factored into
the calculation.
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
-200 bp +200 bp -200 bp +200 bp
<S> <C> <C> <C> <C>
Annual interest income change from an
immediate change in rates $789 $(1,629) $630 $(2,169)
Percent change 2.5% (5.1)% 2.3% (7.9)%
</TABLE>
The table below presents a static gap analysis as of December 31, 1998 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 catego-
ries' rates change when certain independent indices (such as the prime rate)
change, most liability categories are repriced at the Company's discretion.
Interest Rate Sensitive Position
<TABLE>
<CAPTION>
91-180 181-365 Over 1
(Dollars in thousands) 1-90 days days days year Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rate sensitive assets:
Interest-bearing deposits
with banks $ 542 $ -- $ 11,222 $ -- $ 11,764
Taxable securities 69,536 26,790 20,152 125,675 242,153
Tax exempt securities 780 -- 2,287 52,454 55,521
Loans, net of unearned
discount 202,524 37,502 78,500 313,461 631,987
- --------------------------------------------------------------------------------
Total $ 273,382 $ 64,292 $112,161 $491,590 $941,425
- --------------------------------------------------------------------------------
Cumulative total $ 273,382 $337,674 $449,835 $941,425
- --------------------------------------------------------------------------------
Rate sensitive liabilities:
Savings and NOW accounts/1/ $ 100,960 $ 1,482 $ 3,706 $ 71,424 $177,572
Money market accounts 44,375 -- -- -- 44,375
Time deposits 121,229 76,794 102,799 67,824 368,646
Borrowings 81,019 -- 6,249 57,500 144,768
- --------------------------------------------------------------------------------
Total $ 347,583 $ 78,276 $112,754 $196,748 $735,361
- --------------------------------------------------------------------------------
Cumulative total $ 347,583 $425,859 $538,613 $735,361
- --------------------------------------------------------------------------------
Cumulative gap $ (74,201) $(88,185) $(88,778) $206,064
- --------------------------------------------------------------------------------
Cumulative gap to total
assets ratio (7.35)% (8.74)% (8.80)%
- --------------------------------------------------------------------------------
</TABLE>
/1/The decay assumptions on savings and NOW accounts are based on historical
analysis and experience.
24
First Oak Brook Bancshares, Inc.
<PAGE>
- --------------------------------------------------------------------------------
Investment Securities
1998
The Company's investment portfolio decreased $4.4 million, or 1%, during 1998
to $297.7 million at year-end from $302.1 million at year-end 1997. The pro-
ceeds from the credit card portfolio sale in 1997 were primarily invested in
short-term Government agency securities. The 1998 proceeds from security matu-
rities, calls and paydowns were used to fund continued loan demand. The Company
continued its strategy to minimize state income taxes by primarily investing in
state income tax exempt U.S. Treasury and U.S. Government agency securities.
Due to the yield advantages, U.S. Government agency securities were favored
over their U.S. Treasury counterparts.
U.S. Treasury Securities: The Company reduced its holdings of U.S. Treasuries
by $20.2 million to $50.4 million at year-end from $70.6 million at year-end
1997. Proceeds from maturing U.S. Treasuries were used to fund loan demand. The
average maturity of the U.S. Treasury portfolio remained constant at 1.3 years.
U.S. Government Agency and Mortgage Backed Securities: The U.S. Government
agency securities (including U.S. Government agency mortgage backed securities
and agency collateralized mortgage obligations) portfolio decreased $29.9 mil-
lion in 1998 to $137.8 million at year-end from $167.7 million at year-end
1997. The decrease was mainly from the maturities, calls and paydowns of short
to medium term U.S. Government agency and mortgage-backed securities purchased
in 1997 with the proceeds from the sale of the credit card portfolio. In addi-
tion, to continue to minimize the Company's state tax liability, the majority
of U.S. Government securities purchased in 1998 were exempt from state income
taxes. The average maturity of this sector of the portfolio decreased to 2.4
years in 1998 from 3.8 years in 1997.
Municipal Securities: The Company's municipal security holdings increased $8.7
million to $56 million at year-end from $47.4 million at year-end 1997. Due to
their high yields, low credit risk, and pledgability for public deposits, mu-
nicipal securities remain attractive 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: Holdings of corporate and other securities in-
creased $36.9 million to $53.4 million in 1998 from $16.5 million in 1997. The
growth was mainly from the investment in very short term corporate bonds at
year-end 1998 offset by significant paydowns on a corporate CMO purchased in
1997. The remainder of the portfolio consists primarily of $758,000 in pre-
ferred stocks held by the parent company and $4.8 million of Federal Home Loan
Bank stock.
1997
In 1997, the Company's investment portfolio increased $36.1 million or 14% to
$302.1 million. The increases were primarily in the U.S. Government agency sec-
tor of the portfolio. The Company continued its strategy to minimize 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 securities.
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) 1998 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury $ 50,403 $ 70,614 $ 91,141
U.S. Government agencies 102,797 113,730 65,278
Agency mortgage-backed securities 19,683 29,770 54,247
Agency collateralized mortgage obligations 15,310 24,154 --
State and municipal 56,036 47,350 52,484
Corporates and other 53,445 16,480 2,804
- ----------------------------------------------------------------------
Total investment portfolio $297,674 $302,098 $265,954
- ----------------------------------------------------------------------
</TABLE>
At December 31, 1998 there are no investment securities of any one issuer in
excess of 10% of shareholders' equity other than securities of the U.S. Govern-
ment and its agencies.
25
First Oak Brook Bancshares, Inc.
<PAGE>
Management Discussion and Analysis
- --------------------------------------------------------------------------------
The maturity distribution and weighted average yield of investment securities
at December 31, 1998 are presented in the following table:
Analysis of Investment Portfolio
<TABLE>
<CAPTION>
Corporate and
U.S. Treasury U.S. Government State Municipal Other
(Dollars in Securities & Agencies/1/ Securities Securities
thousands) Amount Yield Amount Yield Amount Yield/2/ Amount Yield
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Maturities:
Within 1 year $30,234 6.30% $ 18,390 6.35% $ 6,681 5.60% $ 47,574 5.41%
1-5 years 13,441 5.94 92,796 6.12 16,152 5.39 -- --
5-10 years 6,728 5.72 25,886 7.00 29,410 5.09 250 7.20
After 10 years -- -- 718 5.44 3,793 5.49 5,621/3/ 6.43
- -----------------------------------------------------------------------------------
$50,403 6.13% $ 137,790 6.31% $56,036 5.27% $ 53,445 5.51%
- -----------------------------------------------------------------------------------
Average months to
maturity 15 29 58 2
- -----------------------------------------------------------------------------------
</TABLE>
/1/Included in U.S. Government agencies are agency mortgage-backed securities
(MBS) and agency collateralized mortgage obligations (CMOs). Given the amortiz-
ing nature of MBS and CMOs, the maturities presented in the table are based on
their estimated average lives at December 31, 1998. The estimated average lives
may differ from actual principal cash flows. Principal cash flows include pre-
payments 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.
Loans
1998
At year-end 1998, loans outstanding, net of unearned discount, increased $184.6
million or 41% compared to 1997. Indirect auto loans, commercial and commercial
real estate loans led 1998 loan growth. In addition, the residential mortgage
and home equity loan portfolios posted increases.
Indirect automobile loans increased $59.5 million, or 56%, to $165.3 million in
1998. This increase is due to marketing initiatives and competitive loan pric-
ing. The Company does not buy subprime auto paper.
Commercial loans increased $54 million or 99% to $108.7 million in 1998 and
commercial mortgage loans increased $41 million or 56% to $114.4 million. These
increases were primarily due to additional marketing efforts and competitive
pricing.
Residential real estate loans increased $20.7 million or 21% due to increased
mortgage originations as a result of a declining interest rate environment and
competitive pricing. In 1998, the Company originated approximately $106 million
in new loans of which $53 million were retained in the portfolio and the other
$53 million were sold.
There were no loan concentrations exceeding 10% of total loans at December 31,
1998, which were not otherwise disclosed below.
1997
At year-end 1997, loans outstanding, net of unearned discount, increased $27.2
million or 6% compared to 1996. Indirect auto loans, commercial, home equity
and commercial real estate loans led the 1997 loan growth. Substantially all
credit card loans were sold during 1997.
Indirect automobile loans increased $47.2 million or 81% to $105.8 million in
1997 primarily due to additional marketing efforts and competitive pricing. The
Company does not buy subprime auto paper.
Commercial loans increased $13.8 million and commercial mortgage loans in-
creased $10 million primarily due to competitive pricing and successful market-
ing efforts.
Home equity loans increased $10 million or 18% to $65.3 million in 1997 primar-
ily due to successful mass marketing efforts.
There were no loan concentrations exceeding 10% of total loans at December 31,
1997, which are not otherwise disclosed below.
26
First Oak Brook Bancshares, Inc.
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Loans by Type December 31,
(Dollars in thousands) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial loans $108,685 $ 54,658 $ 40,895 $ 38,171 $ 33,351
Real estate loans--
Construction and land acquisition
loans 41,640 36,525 35,902 28,770 14,789
Commercial mortgage loans 114,373 73,376 63,394 55,437 56,149
Residential mortgage loans 117,438 96,766 93,730 81,226 62,557
Home equity loans 73,149 65,273 55,297 47,357 47,192
Indirect automobile loans/1/ 165,341 105,807 58,578 39,636 23,651
Consumer loans/2/ 11,780 14,932 14,993 14,784 13,416
Credit card loans 213 631 58,114 58,592 59,984
- -------------------------------------------------------------------------------
$632,619 $447,968 $420,903 $363,973 $311,089
Less:
Unearned discount 632 636 739 1,245 1,408
Allowance for loan losses 4,445 4,329 4,109 3,932 3,859
- -------------------------------------------------------------------------------
Loans, net $627,542 $443,003 $416,055 $358,796 $305,822
- -------------------------------------------------------------------------------
</TABLE>
/1/Indirect automobile loans represent consumer auto loans made through a net-
work of new car dealers.
/2/Included in this amount are student loans, direct automobile loans and check
credit loans.
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 es-
tate loans are secured by first mortgages and the home equity loans are secured
primarily by junior liens on one-to-four family residences in the Chicago Met-
ropolitan 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, 1998:
<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 $ 56,001 $ 40,780 $ 11,904 $108,685
Real estate--construction and land
acquisition loans/2/ 26,004 6,676 8,960 41,640
Commercial and residential mortgage loans 14,272 56,090 161,449 231,811
Home equity loans 5,922 67,227 -- 73,149
- ------------------------------------------------------------------------------
$102,199 $170,773 $182,313 $455,285
- ------------------------------------------------------------------------------
</TABLE>
/1/Includes demand loans.
/2/Included in construction loans is a $9.0 million loan that has been fully
disbursed to an escrow account. This loan is secured by building and construc-
tion that is expected to be completed during the first half of 1999.
The following table indicates, for the loans in the Maturity Distribution ta-
ble, the amounts due after one year which have fixed and variable interest
rates at December 31, 1998:
<TABLE>
<CAPTION>
Fixed Variable
(Dollars in thousands) Rate Rate Total
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial loans $ 43,126 $ 9,558 $ 52,684
Real estate--construction and land acquisition
loans 8,960 6,676 15,636
Commercial and residential mortgage loans 154,636 62,903 217,539
Home equity loans 11,710 55,517 67,227
- --------------------------------------------------------------------------
$218,432 $134,654 $353,086
- --------------------------------------------------------------------------
</TABLE>
27
First Oak Brook Bancshares, Inc.
<PAGE>
Management Discussion and Analysis
- --------------------------------------------------------------------------------
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, LIBOR 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
At year-end 1998, total deposits increased $150 million or 24%, compared to
1997. This increase was primarily due to a $93.9 million increase in time de-
posits, which was the result of successful retail deposit promotions. In addi-
tion, through successful marketing, the Company increased noninterest-bearing
demand deposits, primarily business accounts, by $33.4 million at year-end,
1998. At December 31, 1998, there were no brokered deposits.
Average deposits for 1998 increased $92.6 million or 15% as compared to 1997.
The increase in average deposits is primarily due to a $18.9 million increase
in noninterest-bearing demand deposits, primarily business accounts, and a
$69.1 million increase in time deposits, primarily from 1998 retail promotions.
Average deposits for 1997 increased $26.1 million or 4% as compared to 1996.
The increase in average deposits is primarily due to a $14.4 million increase
in noninterest-bearing demand deposits, primarily business accounts, and a
$21.2 million increase in time deposits, primarily from public funds and 1996
retail promotions, offset by a $13.7 million decrease in savings deposits.
Average Deposits and Rate by Type
<TABLE>
<CAPTION>
1998 1997 1996
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand
deposits $170,146 --% $151,257 --% $136,866 --%
Savings deposits and NOW accounts 171,067 3.34 172,533 3.57 186,195 3.68
Money market accounts 40,139 3.24 34,071 3.20 29,865 3.01
Time deposits 346,807 5.77 277,727 5.81 256,520 5.76
- -------------------------------------------------------------------------------
Total $728,159 3.71% $635,588 3.68% $609,446 3.70%
- -------------------------------------------------------------------------------
</TABLE>
As of December 31, 1998, the scheduled maturities of time deposits are as fol-
lows:
Maturity Distribution of Time Deposits
<TABLE>
<CAPTION>
(Dollars in thousands)
----------------------------------------------------------------------------------
<S> <C>
1999 $300,822
2000 40,385
2001 3,602
2002 13,967
2003 5,197
2004 and thereafter 4,673
----------------------------------------------------------------------------------
Total $368,646
----------------------------------------------------------------------------------
</TABLE>
Borrowings
Short-term borrowings, which include Federal funds purchased, securities sold
under agreements to repurchase and treasury, tax and loan demand notes, were
$87.3 million at December 31, 1998, up $22.2 million from $65.1 million at the
end of 1997. The 1998 increase was primarily due to an increase in Federal
funds purchased partially offset by a decline in the treasury tax and loan
notes. In 1997, short-term borrowings increased to $65.1 million from $55.2
million in 1996, primarily due to an increase in Federal funds purchased par-
tially offset by a decrease in securities sold under agreement to repurchase.
As a member of the Federal Home Loan Bank, the Bank may obtain advances secured
by certain of its residential mortgage loans and other assets. The Company sig-
nificantly expanded its utilization of the Federal Home Loan Bank advances due
to the comparatively favorable terms available. Borrowings increased to $57.5
million at December 31, 1998, from $42.5 million at December 31, 1997, up 35%.
There were no such borrowings outstanding at December 31, 1996. Borrowings ma-
ture from 2000 to 2008 and bear fixed interest rates ranging from 5.23% to
6.41%. See "Borrowings" note to the financial statements for additional infor-
mation.
28
First Oak Brook Bancshares, Inc.
<PAGE>
- --------------------------------------------------------------------------------
Capital Resources
One of the Company's primary objectives is to maintain strong capital to war-
rant the confidence of our customers, shareholders and bank regulatory agen-
cies. 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 inherent business risks. The
Company's capital objectives are to:
. maintain sufficient capital to support the risk characteristics of the Com-
pany and the Company's subsidiary bank; and
. maintain capital ratios which meet and exceed the "well-capitalized" regula-
tory capital ratio guidelines for the Company's subsidiary bank, thereby min-
imizing regulatory intervention and lowering FDIC assessments.
At December 31, 1998, the Company achieved record shareholders' equity of $77.1
million. The Company's and its subsidiary bank's capital ratios not only ex-
ceeded minimum regulatory guidelines, but also the FDIC criteria for "well-cap-
italized" banks. As a result of loan growth, the risk weighted assets of the
Bank have increased resulting in a decrease in the Bank's capital ratios. The
Company is currently analyzing various sources of additional capital. See the
"Regulatory Capital" note to the financial statements for required disclosures.
In 1998, cash dividends declared totaled $2,282,000, a 33% increase from 1997.
The Board declared an increased quarterly cash dividend in October, 1998 based
on strong earnings and capital. The new quarterly dividend paid in January,
1999, on the Class A common and common stock was $.10 per share and $.0825 per
share, respectively. In 1997, cash dividends declared totaled $1,711,000, a 29%
increase from 1996.
On January 28, 1997, the Company's Board of Directors authorized a stock repur-
chase program. The program allowed the Company to repurchase up to 4%, or ap-
proximately 270,000 shares, of its Class A or common stock through mid-1998.
This program was completed in 1998.
On January 27, 1998, the Board of Directors authorized another stock repurchase
program. The program allows the Company to repurchase up to an additional
200,000 shares of its Class A common stock through mid-1999. Repurchases can be
made in the open market or through negotiated transactions from time to time
depending on market conditions. The stock, if repurchased, will be held as
treasury stock to be used for general corporate purposes. As of December 31,
1998, approximately 114,000 shares are available to be purchased; however, this
program may not be completed.
Year 2000 Compliance
The Company, through its subsidiary bank, established a Year 2000 Task Force
comprised of over thirty employees headed by senior officers from the Informa-
tion Technology and Legal Departments. In accordance with the guidelines estab-
lished by the Federal Financial Institutions Examination Council, the Task
Force developed a project plan consisting of five phases: Awareness and Plan-
ning, Assessment, Renovation, Validation and Implementation.
During the Awareness and Planning phase, the Company's Task Force was estab-
lished. The Task Force coordinated and developed a comprehensive plan to insure
that the Company's computer programs and systems become Year 2000 compliant.
The Task Force conducted a Company-wide survey of all hardware and software
programs and systems and designated a Task Force member to monitor Y2K compli-
ance. This monitoring function included contacting vendors regarding their Y2K
efforts and obtaining the vendors' certification that their systems are fully
tested and Year 2000 compliant. The systems were prioritized into mission crit-
ical, not-mission critical and, not-critical, and target dates for testing were
established.
During the second phase, Assessment, the Task Force identified and prioritized
all Bank systems and developed standard testing criteria. Mission critical sys-
tems were given highest priority. The Bank completed its assessment of all com-
puter programs and systems and physical facilities. Any new system acquired
will be tested and certified Year 2000 compliant prior to use. The Bank also
assessed the Year 2000 compliance of its corporate borrowers, pursuant to its
Year 2000 credit policy. The Bank established criteria for identifying, moni-
toring, and assessing the risks associated with its corporate borrowers' Year
2000 compliance.
During the Renovation phase, the Company continued to monitor the Year 2000 ef-
forts of its vendors and customers. Time lines were established for installa-
tion of vendor Year 2000 compliant system upgrades. The Bank's core data
processing system, a mission critical system, is run on an IBM AS400, process-
ing the Jack Henry Silverlake Software. The hardware is certified as Year 2000
compliant. The Bank tested the software during the week of February 8, 1999 and
the preliminary results indicate that the system performed all functions in
compliance with Year 2000; these results are consistent with the vendor's inde-
pendent tests, as well as, the assurances received from the vendor.
29
First Oak Brook Bancshares, Inc.
<PAGE>
Management Discussion and Analysis
- --------------------------------------------------------------------------------
Also during the Renovation Phase, the Company estimated the costs for Year 2000
testing and replacement of systems not Year 2000 compliant. The Company esti-
mates that the out-of-pocket costs for testing will not exceed $100,000. Costs
not quantified are the number of internal man-hours expended to assess, test
and certify that the systems are Year 2000 compliant. The Company believes that
the costs will not have a material effect on its costs of operations. Due to
new releases of software provided by vendors, a number of systems became Year
2000 compliant, the costs of which were included under maintenance agreements.
The Company's telephone voice response system and application processing system
used for consumer auto loans and home equity credit lines, proved not to be
Year 2000 compliant. The Company purchased a Year 2000 compliant voice response
system and is currently negotiating the purchase of a new application process-
ing system. The preliminary initial costs to replace these non-compliant sys-
tems will be approximately $200,000. The Company will continue to expense costs
for Year 2000 compliance as they occur consistent with generally accepted ac-
counting principles.
The fourth phase, Validation, is still in process, as the Company is verifying
system test results, in particular, its mission critical core data processing
system. The validation of mission critical systems should be completed by April
30, 1999.
In the fifth and final phase, Implementation, the Company has been and will
continue implementing for internal use only those systems certified to be Year
2000 compliant. Contingency plans have been developed and completed for all
mission critical systems that were not fully validated. The Company has written
business resumption plans for all mission critical systems, and these plans
will be tested by June 30, 1999.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
131, "Disclosures about Segments of an Enterprise and Related Information". The
provisions of this statement require disclosure of financial and descriptive
information about an enterprise's operating segments in annual and interim fi-
nancial reports issued to shareholders. The statement defines an operating seg-
ment as a component of an enterprise that engages in business activities that
generate revenue and incur expense, whose operating results are reviewed by the
chief operating decision maker in the determination of resource allocation and
performance, and for which discrete financial information is available. The
Company has determined that it does not have separate operating segments and
the disclosure requirements under this statement do not apply to the Company.
In June 1998, the FASB issued Statement 133, "Accounting for Derivatives and
Hedging Transactions" (Statement 133). Statement 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, collectively referred to as deriva-
tives, and for hedging activities. Statement 133 will not be effective for the
Company until 2000 and is not anticipated to have a material effect on the fi-
nancial statements of the Company.
In October 1998, the FASB issued Statement 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans held for Sale by
a Mortgage Banking Enterprise" (Statement 134). Statement 134 requires that af-
ter the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities
or other retained interests based on its ability and intent to sell or hold
those investments, as described in Statement 115, "Accounting for Certain In-
vestments in Debt and Equity Securities". Statement 134 shall be effective for
fiscal years beginning after December 15, 1998 and is not expected to have a
material effect on financial statements of the Company.
30
First Oak Brook Bancshares, Inc.
<PAGE>
Report of Independent Auditors
- --------------------------------------------------------------------------------
Board of Directors and Shareholders
First Oak Brook Bancshares, Inc.:
We have audited the accompanying consolidated balance sheet of First Oak Brook
Bancshares, Inc. and subsidiary as of December 31, 1998, and the related con-
solidated statements of income, changes in shareholders' equity, and cash flows
for the year then ended. 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 audit. The accompanying consolidated finan-
cial statements of First Oak Brook Bancshares, Inc. and subsidiary as of Decem-
ber 31, 1997, and for each of the years in the two-year period ended December
31, 1997, were audited by other auditors whose report thereon dated January 20,
1998, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting 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 pre-
sentation. We believe that our audit provides a reasonable basis for our opin-
ion.
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 as of December 31, 1998, and the results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Chicago, Illinois
February 5, 1999
31
First Oak Brook Bancshares, Inc.
<PAGE>
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 41,759 $ 32,893
Federal funds sold 362 --
Interest-bearing deposits with banks 11,402 10,239
Investment securities:
Securities held-to-maturity, at amortized cost (fair
value of $143,980 and $145,639 in 1998 and 1997,
respectively) 141,253 142,682
Securities available-for-sale, at fair value 156,421 159,416
Loans, net of unearned discount 631,987 447,332
Less-allowance for loan losses (4,445) (4,329)
- ------------------------------------------------------------------------------
Net loans 627,542 443,003
Premises and equipment, net 21,032 18,773
Other assets 9,504 9,138
- ------------------------------------------------------------------------------
Total Assets $1,009,275 $816,144
- ------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Noninterest-bearing demand deposits $ 187,209 $153,806
Interest-bearing deposits:
Savings deposits and NOW accounts 177,572 166,040
Money market accounts 44,375 33,139
Time deposits
Under $100,000 181,924 113,839
$100,000 and over 186,722 160,939
- ------------------------------------------------------------------------------
Total interest-bearing deposits 590,593 473,957
- ------------------------------------------------------------------------------
Total deposits 777,802 627,763
Federal funds purchased and securities sold under
agreements to repurchase 83,586 52,608
Treasury, tax and loan demand notes 3,682 12,508
Federal Home Loan Bank borrowings 57,500 42,500
Other liabilities 9,644 9,104
- ------------------------------------------------------------------------------
Total Liabilities 932,214 744,483
- ------------------------------------------------------------------------------
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 $11,588 or $3.16 per share)
authorized--10,000,000 shares in 1998 and 8,000,000
shares in 1997, issued--4,019,902 shares in 1998 and
3,972,814 shares in 1997, outstanding--3,666,902
shares in 1998 and 3,736,814 shares in 1997 8,040 7,946
Common stock, $2 par value, authorized--6,000,000
shares, issued--3,263,354 shares in 1998 and 3,297,792
shares in 1997, outstanding--2,915,938 shares in 1998
and 2,949,746 shares in 1997 6,527 6,596
Surplus 11,955 11,802
Accumulated other comprehensive income, net of taxes 2,263 1,644
Retained earnings 54,406 47,258
Less cost of shares in treasury, 353,000 and 236,000
Class A common shares in 1998 and 1997, respectively
and 347,416 and 348,046 common shares in 1998 and
1997, respectively (6,130) (3,585)
- ------------------------------------------------------------------------------
Total Shareholders' Equity 77,061 71,661
- ------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $1,009,275 $816,144
- ------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
32
First Oak Brook Bancshares, Inc.
<PAGE>
Consolidated Statements of Income
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands except per share amounts) Year Ended December 31,
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest on loans $40,811 $36,305 $36,163
Interest on securities:
U.S. Treasury and Government agencies 14,127 14,412 12,139
Obligations of states and political subdivisions 2,574 2,517 2,848
Other securities 1,314 631 366
Interest on Federal funds sold and securities
purchased under agreements to resell 2,106 460 943
Interest on deposits with banks 764 362 13
- -----------------------------------------------------------------------------
Total interest income 61,696 54,687 52,472
Interest expense:
Interest on savings deposits and NOW accounts 5,711 6,159 6,852
Interest on money market accounts 1,302 1,089 900
Interest on time deposits 20,016 16,125 14,786
Interest on Federal funds purchased and securities
sold under agreements to repurchase 2,491 2,612 2,701
Interest on treasury, tax and loan demand notes 523 489 357
Interest on Federal Home Loan Bank borrowings 3,243 781 42
- -----------------------------------------------------------------------------
Total interest expense 33,286 27,255 25,638
- -----------------------------------------------------------------------------
Net interest income 28,410 27,432 26,834
Provision for loan losses 630 1,550 1,510
- -----------------------------------------------------------------------------
Net interest income after provision for loan losses 27,780 25,882 25,324
- -----------------------------------------------------------------------------
Other income:
Service charges on deposit accounts 3,190 2,730 2,381
Investment management and trust fees 1,048 1,025 653
Merchant card processing fees 1,329 964 511
Income from revenue sharing agreement 900 450 --
Other operating income 1,445 1,130 1,088
Investment securities gains (losses), net 79 (9) 14
Gain on sale of credit card portfolio -- 9,251 --
- -----------------------------------------------------------------------------
Total other income 7,991 15,541 4,647
- -----------------------------------------------------------------------------
Other expenses:
Salaries and employee benefits 13,680 12,293 11,766
Occupancy expense 1,566 1,457 1,430
Equipment expense 1,906 1,566 1,737
Data processing 776 1,301 1,625
Postage, stationery and supplies 834 768 752
Advertising and business development 1,090 1,191 1,205
Merchant interchange expense 994 697 311
Other operating expenses 1,577 1,435 1,609
- -----------------------------------------------------------------------------
Total other expenses 22,423 20,708 20,435
- -----------------------------------------------------------------------------
Income before income taxes 13,348 20,715 9,536
Income tax expense 3,907 6,962 2,429
- -----------------------------------------------------------------------------
Net income $ 9,441 $13,753 $ 7,107
- -----------------------------------------------------------------------------
Basic earnings per share $ 1.42 $ 2.09 $ 1.06
- -----------------------------------------------------------------------------
Diluted earnings per share $ 1.39 $ 2.03 $ 1.03
- -----------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
33
First Oak Brook Bancshares, Inc.
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
Common Stock Common Stock
(Dollars in thousands
except Accumulated Other Total
share and per share Par Par Comprehensive Retained Treasury Shareholders'
amounts) Shares Value Shares Value Surplus Income net of tax Earnings Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 3,677,364 $7,354 3,390,374 $6,781 $10,368 $ 356 $29,636 $ (733) $53,762
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income, net of tax
Net income 7,107 7,107
Unrealized holding loss
during the period of
$73, net of
reclassification
adjustment for gain
included in net income
of $10 (83) (83)
-------
Total comprehensive
income 7,024
Conversion of common
stock into Class A
common stock 31,600 64 (31,600) (64)
Dividends declared (1,324) (1,324)
Exercise of stock
options 23,502 48 104 (24) 128
Purchase of treasury
stock (3,000 shares of
common stock) (37) (37)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 3,708,964 $7,418 3,382,276 $6,765 $10,472 $ 273 $35,395 $ (770) $59,553
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income, net of tax
Net income 13,753 13,753
Unrealized holding gain
during the period of
$1,365, net of
reclassification
adjustment for loss
included in net income
of $6 1,371 1,371
-------
Total comprehensive
income 15,124
Conversion of common
stock into Class A
common stock 269,548 540 (269,548) (540)
Dividends declared (1,711) (1,711)
Exercise of stock
options (5,698) (12) 185,064 371 1,330 (179) 1,510
Purchase of treasury
stock (2,992 shares of
common and 236,000
shares of Class A
common) (2,815) (2,815)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 3,972,814 $7,946 3,297,792 $6,596 $11,802 $1,644 $47,258 $(3,585) $71,661
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income, net of tax
Net income 9,441 9,441
Unrealized holding gain
during the period of
$681, net of
reclassification
adjustment for gain
included in net income
of $52 619 619
-------
Total comprehensive
income 10,060
Conversion of common
stock into Class A
common stock 47,088 94 (47,088) (94)
Dividends declared (2,282) (2,282)
Exercise of stock
options 12,650 25 153 (11) 9 176
Purchase of treasury
stock
(470 shares of common
and 117,000 shares of
Class A common) (2,554) (2,554)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 4,019,902 $8,040 3,263,354 $6,527 $11,955 $2,263 $54,406 $(6,130) $77,061
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
34
First Oak Brook Bancshares, Inc.
<PAGE>
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 9,441 $ 13,753 $ 7,107
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on credit card portfolio sale -- (9,251) --
Depreciation and amortization 2,056 1,762 1,904
Discount accretion (1,398) (839) (557)
Premium amortization 1,255 1,500 1,843
Provision for loan losses 630 1,550 1,510
Deferred taxes (1,039) 233 (286)
Investment securities (gains) losses (79) 9 (14)
Revenue sharing agreement 919 543 --
Increase in other assets (2,240) (1,803) (287)
Increase in other liabilities 1,260 2,553 889
Amortization of intangible assets 42 43 70
- ------------------------------------------------------------------------------
Net cash provided by operating activities 10,847 10,053 12,179
Cash flows from investing activities:
Purchase of interest bearing deposits with
banks -- (10,177) --
Purchase of securities held-to-maturity (66,156) (80,742) (50,330)
Purchase of securities available-for-sale (151,125) (85,931) (79,094)
Proceeds from maturities, calls and paydowns
of securities held-to-maturity 68,121 32,382 41,898
Proceeds from maturities, calls and paydowns
of securities available-for-sale 48,327 47,549 30,073
Proceeds from sales of securities available-
for-sale 106,417 52,005 46,293
Proceeds from credit card portfolio sale -- 64,000 --
Increase in loans (185,169) (83,248) (58,769)
Additions to premises and equipment (4,315) (3,065) (1,475)
- ------------------------------------------------------------------------------
Net cash used in investing activities (183,900) (67,227) (71,404)
Cash flows from financing activities:
Increase in demand deposits 33,403 6,309 19,261
Increase (decrease) in savings and NOW
accounts 11,532 (14,043) (11,880)
Increase in money market accounts 11,236 1,112 5,433
Increase (decrease) in time deposits 93,868 (13,918) 80,403
Increase (decrease) in Federal funds purchased
and securities sold under agreements to
repurchase 30,978 9,403 (11,452)
Increase (decrease) in treasury, tax and loan
demand notes (8,826) 526 5,937
Proceeds from Federal Home Loan Bank
borrowings 42,500 42,500 --
Repayment of Federal Home Loan Bank borrowings (27,500) -- (3,500)
Purchase of treasury stock (2,554) (2,815) (37)
Exercise of stock options 176 1,510 128
Cash dividends (2,282) (1,711) (1,324)
- ------------------------------------------------------------------------------
Net cash provided by financing activities 182,531 28,873 82,969
- ------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 9,478 (28,301) 23,744
Cash and cash equivalents at beginning of year 32,954 61,255 37,511
- ------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 42,432 $ 32,954 $ 61,255
- ------------------------------------------------------------------------------
Supplemental disclosures:
Interest paid $ 32,697 $ 27,195 $ 24,495
Income taxes paid 3,204 5,795 2,399
- ------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
35
First Oak Brook Bancshares, Inc.
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 general retail and commercial banking business, primarily in the Chicago
Metropolitan area. The services offered include demand, savings and time depos-
its, corporate cash management services, commercial lending products such as
commercial loans, mortgages and letters of credit, and personal lending prod-
ucts such as residential mortgages, home equity lines and auto loans. The sub-
sidiary bank has a full service investment management and 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 consoli-
dated financial statements and accompanying notes. Actual results could differ
from those estimates.
Investment Securities: Securities are classified as held-to-maturity, avail-
able-for-sale or trading at the time of purchase. 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. All other securities are classified as available-for-sale and stated at
fair value, with the unrealized gains and losses, net of tax, reported as a
separate component of shareholders' equity. The Company does not carry any se-
curities for trading purposes.
The amortized cost of securities classified as held-to-maturity or available-
for-sale is adjusted for amortization of premiums to the earlier of maturity or
call date, and accretion of discounts to maturity, or in the case of mortgage-
backed securities, over the estimated life of the security. The cost of securi-
ties 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 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 which are determined to
be uncollectible are charged off against the allowance for loan losses and re-
coveries of loans that were previously charged off are credited to the allow-
ance.
The Company's charge-off policy varies with respect to specific circumstances
surrounding each loan under consideration. The Company's policy with respect to
commercial, real estate, indirect auto and other loans is to charge-off 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.
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
due (principal and interest) pursuant to the original contractual terms. The
Company measures impairment based upon the present value of expected future
cash flows discounted at the loan's original effective interest rate or the
fair value of the collateral if the loan is collateral dependent. Large groups
of homogeneous loans, such as residential mortgage, home equity, indirect auto
and consumer loans, are collectively evaluated for impairment. Interest income
on impaired loans is recognized using either the cash basis method or a cost
recovery method depending upon the circumstances.
Commercial, real estate, commercial mortgage and construction loans are placed
on nonaccrual status when the collectibility of the contractual principal or
interest is deemed doubtful by management or when the loan becomes 90 days or
more past due and is not well secured or in the process of collection.
Premises and Equipment: Premises, leasehold improvements and equipment are
stated at cost less accumulated depreciation and amortization. For financial
reporting purposes, depreciation is charged to expense 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.
36
First Oak Brook Bancshares, Inc.
<PAGE>
- --------------------------------------------------------------------------------
Income Taxes: The Company and its subsidiary file consolidated income tax re-
turns. 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 Share: Basic earnings per share (EPS) is computed by dividing net
income by the weighted average number of common shares outstanding for the pe-
riod. Diluted EPS is computed by dividing net income by the weighted average
number of common shares adjusted for the dilutive effect of outstanding stock
options.
Stock Options: The Company accounts for stock options in accordance with Ac-
counting Principles Board Opinion No. 25, "Accounting for Stock Issued to Em-
ployees" (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.
Comprehensive Income: In June 1997, the FASB issued Statement 130, "Reporting
Comprehensive Income". This statement establishes standards for reporting the
components of comprehensive income and requires that all items that are re-
quired to be recognized under accounting standards as components of comprehen-
sive income be included in a financial statement that is displayed with the
same prominence as other financial statements. Comprehensive income consists of
net income and net unrealized gains (losses) on available-for-sale securities
and is presented in the Consolidated Statements of Changes in Stockholders' Eq-
uity. The Company adopted the provisions of this statement in 1998. These dis-
closure requirements had no impact on financial position or results of opera-
tions.
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, and interest bearing deposits with banks with original maturities of 90
days or less.
Reclassifications: Certain amounts in the 1997 and 1996 consolidated financial
statements have been reclassified to conform to their 1998 presentation and re-
stated to give effect to the 100% stock dividend declared on July 21, 1998.
- --------------------------------------------------------------------------------
Note 2. 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 years ended December 31, 1998 and 1997 were
$3,118,000 and $7,746,000, respectively.
37
First Oak Brook Bancshares, Inc.
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 3. Investment Securities
The aggregate amortized cost and fair values of securities, and gross
unrealized gains and losses at December 31 follow:
<TABLE>
<CAPTION>
1998 1997
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Treasury $ 34,329 $ 466 $ -- $ 34,795 $ 41,245 $ 210 $ (99) $ 41,356
U.S. Government agencies 60,986 1,892 -- 62,878 67,384 1,531 (4) 68,911
Agency mortgage-backed
securities 12,871 85 (83) 12,873 18,763 110 (66) 18,807
Agency collateralized
mortgage obligations 9,481 66 (3) 9,544 6,633 57 (7) 6,683
Obligations of states and
political subdivisions 19,728 983 (1) 20,710 18,419 914 (4) 19,329
Corporate and other
securities 15,570 51 -- 15,621 4,330 -- -- 4,330
- -------------------------------------------------------------------------------------------------------------------
Total securities available-
for-sale $152,965 $3,543 $(87) $156,421 $156,774 $2,822 $(180) $159,416
- -------------------------------------------------------------------------------------------------------------------
Securities held-to-maturity:
U.S. Treasury $ 15,608 $ 175 $ -- $ 15,783 $ 29,258 $ 249 $ -- $ 29,507
U.S. Government agencies 39,919 1,160 -- 41,079 44,819 1,381 (10) 46,190
Agency mortgage-backed
securities 6,810 115 (1) 6,924 10,963 197 (1) 11,159
Agency collateralized
mortgage obligations 5,766 28 (6) 5,788 17,471 63 (15) 17,519
Obligations of states and
political subdivisions 35,326 1,149 (80) 36,395 28,021 852 (93) 28,780
Corporate and other
securities 37,824 187 -- 38,011 12,150 334 -- 12,484
- -------------------------------------------------------------------------------------------------------------------
Total securities held-to-
maturity $141,253 $2,814 $(87) $143,980 $142,682 $3,076 $(119) $145,639
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair values of investment securities at December 31,
1998, by contractual maturity, are shown below. Agency mortgage-backed securi-
ties 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 corporate collateralized
mortgage obligations, preferred stock and Federal Home Loan Bank of Chicago
stock, which have no stated maturity date.
<TABLE>
<CAPTION>
Amortized Fair
(Dollars in thousands) Cost Value
- ----------------------------------------------------------
<S> <C> <C>
Securities available-for-sale:
Due in one year or less $ 39,439 $ 39,592
Due after one year through five years 75,952 77,373
Due after five years through ten years 31,239 33,011
Over ten years 765 824
Other securities 5,570 5,621
- ----------------------------------------------------------
$152,965 $156,421
- ----------------------------------------------------------
Securities held-to-maturity:
Due in one year or less $ 63,287 $ 63,671
Due after one year through five years 45,016 45,740
Due after five years through ten years 29,263 30,812
Over ten years 3,687 3,757
- ----------------------------------------------------------
$141,253 $143,980
- ----------------------------------------------------------
</TABLE>
At December 31, 1998, investment securities with a book value of $230,920,000
were pledged as collateral to secure certain deposits and for other purposes as
required by law.
38
First Oak Brook Bancshares, Inc.
<PAGE>
- --------------------------------------------------------------------------------
Proceeds from sales of available-for-sale investments in debt and equity secu-
rities during 1998, 1997 and 1996 were $106,417,000, $52,005,000 and
$46,293,000 respectively. Gross gains of $81,000 and gross losses of $2,000
were realized on those sales in 1998. Gross gains of $194,000 and gross losses
of $203,000 were realized on those sales in 1997. Gross gains of $21,000 and
gross losses of $7,000 were realized on those sales in 1996.
- --------------------------------------------------------------------------------
Note 4. Loans
Loans outstanding at December 31 follow:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- ------------------------------------------------------
<S> <C> <C>
Commercial $108,685 $ 54,658
Real estate loans--
Construction and land acquisition 42,342 36,525
Commercial mortgage 113,671 73,376
Residential mortgage 117,438 96,766
Home equity loans 73,149 65,273
Indirect automobile loans 165,341 105,807
Consumer loans 11,993 15,563
- ------------------------------------------------------
Total loans 632,619 447,968
Less unearned discount (632) (636)
- ------------------------------------------------------
Loans, net of unearned discount $631,987 $447,332
- ------------------------------------------------------
</TABLE>
The Company originates real estate, commercial and consumer loans primarily
within the Chicago Metropolitan area. Generally, real estate and consumer loans
are secured by various items of property such as first and second mortgages,
automobiles and cash collateral. Substantially all of the commercial portfolio
is secured by business assets.
Loans secured by residential real estate are expected to be paid by the borrow-
ers' cash flows or proceeds from the sale or refinancing of the underlying real
estate. Such loans are primarily secured by real estate within the Chicago Met-
ropolitan area. Performance of these loans may be affected by conditions influ-
encing the local economy and real estate market. However, the Company's loan
policy generally requires that the loan to value ratio should not exceed eighty
percent of the appraised value of the real estate.
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. 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.
A summary of these commitments to extend credit at December 31 follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- -------------------------------------------------------
<S> <C> <C>
Commercial $ 64,364 $ 46,831
Commercial mortgage 39,973 37,834
Home equity 94,500 80,338
Check credit 872 969
- -------------------------------------------------------
Total commitments to extended credit $199,709 $165,972
- -------------------------------------------------------
</TABLE>
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- -------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $4,329 $ 4,109 $ 3,932
Provision for loan losses 630 1,550 1,510
Recoveries 215 175 178
Charge-offs (729) (1,505) (1,511)
- -------------------------------------------------------
Balance at end of year $4,445 $ 4,329 $ 4,109
- -------------------------------------------------------
</TABLE>
39
First Oak Brook Bancshares, Inc.
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company had no nonaccrual loans or impaired loans, as defined, at December
31, 1998 or 1997. The average balance of impaired loans was $835,000 and
$2,127,000 for 1997 and 1996, respectively. There were no impaired loans during
1998. The Company did not recognize any interest income associated with im-
paired loans during 1998, 1997 or 1996. If interest had been accrued at its
original term, such income would have approximated $52,000 in 1997 and $101,000
in 1996.
- --------------------------------------------------------------------------------
Note 5. Premises and Equipment
A summary of premises and equipment at December 31 follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Land $ 3,552 $ 3,272
Buildings and improvements 17,420 15,270
Construction in progress 724 1,347
Leasehold improvements 997 997
Data processing equipment, office equipment and furniture 13,073 10,739
- ------------------------------------------------------------------------------
35,766 31,625
Less accumulated depreciation and amortization (14,734) (12,852)
- ------------------------------------------------------------------------------
Premises and equipment, net $ 21,032 $ 18,773
- ------------------------------------------------------------------------------
</TABLE>
The Company has entered into a number of noncancellable operating lease agree-
ments for certain of its subsidiary bank's office premises. The minimum annual
net rental commitments under these leases at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
(Dollars
in
thousands)
-----------------
<S> <C>
1999 $144
2000 100
2001 48
2002 33
2003 8
-----------------
$333
-----------------
</TABLE>
Total rental expense for 1998, 1997 and 1996 was approximately $194,000,
$194,000 and $193,000 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 which expire in 2001 are as fol-
lows:
<TABLE>
<CAPTION>
(Dollars
in
thousands)
-----------------
<S> <C>
1999 $328
2000 337
2001 312
-----------------
$977
-----------------
</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.
40
First Oak Brook Bancshares, Inc.
<PAGE>
- --------------------------------------------------------------------------------
Note 6. Borrowings
The Company's borrowings at December 31, 1998 and 1997 consisted of Federal
funds purchased, securities sold under repurchase agreements (repos), treasury,
tax and loan notes and Federal Home Loan Bank borrowings. The Federal funds
purchased generally represent one day borrowings obtained from correspondent
banks. The repos represent borrowings which have maturities within one year and
are secured by U.S. Treasury and agency securities. A summary of borrowings
follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- --------------------------------------------
Federal Home Loan Bank borrowings:
<S> <C> <C>
At December 31 $57,500 $ 42,500
Average rate at year-end 5.72% 5.74%
- --------------------------------------------
</TABLE>
Federal funds purchased, repos and treasury, tax and demand notes:
<TABLE>
<S> <C> <C>
At December 31 $87,268 $ 65,116
Average during the year 59,110 59,881
Maximum month-end balance 87,268 76,158
Average rate at year-end 5.09% 5.79%
Average rate during the year 5.10% 5.18%
- ------------------------------------------------
</TABLE>
Federal Home Loan Bank borrowings at December 31, 1998 follows (dollars in
thousands):
<TABLE>
<CAPTION>
Interest
Amount Rate Maturity
----------------------------------------------------------------------------------------
<S> <C> <C>
$ 5,000 5.48% February 22, 2000
5,000 5.71 June 18, 2002
5,000 6.41 September 25, 2002
10,000 5.84 February 19, 2003
1,500 5.43 November 20, 2003
10,000 5.97 February 19, 2005
15,000 5.23 January 12, 2008
6,000 6.04 February 19, 2008
----------------------------------------------------------------------------------------
$57,500
----------------------------------------------------------------------------------------
</TABLE>
The borrowings due on February 22, 2000 and June 18, 2002 are callable on Feb-
ruary 21, 1999 and March 17, 1999 respectively.
The Company has adopted a collateral pledge agreement whereby the Company has
agreed to keep on hand, at all times, free of all other pledges, liens, and en-
cumbrances, first mortgage residential loans with unpaid principal balances ag-
gregating no less than 167% of the outstanding borrowings from the Federal Home
Loan Bank of Chicago (FHLB). All stock in the FHLB of Chicago, totaling $4.8
million and $3.8 million at December 31, 1998 and 1997, respectively, is
pledged as additional collateral for these borrowings.
The Company has a revolving credit arrangement with a third party unaffiliated
bank for $5 million which matures on May 1, 1999. The line was unused during
1998 and 1997.
41
First Oak Brook Bancshares, Inc.
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 7. Income Taxes
The components of income tax expense for the years ended December 31 follow:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- -----------------------------------------------------
<S> <C> <C> <C>
Current $ 4,946 $6,729 $2,715
Deferred provision (benefit) (1,039) 233 (286)
- -----------------------------------------------------
Total income tax expense $ 3,907 $6,962 $2,429
- -----------------------------------------------------
</TABLE>
The net deferred tax assets (liabilities) at December 31 consisted of the fol-
lowing:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
Gross deferred tax liabilities:
Unrealized gains on securities available-for-sale $1,193 $ 847
Accretion of discount on securities 206 539
Depreciation 713 653
Amortization of intangible assets -- 8
Book over tax basis of land 205 205
Deferred loan costs 371 188
Other, net 252 (21)
- -----------------------------------------------------------------
Total deferred tax liabilities 2,940 2,419
Gross deferred tax assets:
Book over tax loan loss reserve 1,763 1,717
Revenue sharing agreement 920 --
Retirement plan 246 280
Deferred expenses 265 156
- -----------------------------------------------------------------
Total deferred tax assets 3,194 2,153
- -----------------------------------------------------------------
Net deferred tax assets (liabilities) $ 254 $ (266)
- -----------------------------------------------------------------
</TABLE>
No valuation allowance related to deferred tax assets has been recorded at De-
cember 31, 1998 and 1997 as management believes it is more likely than not that
the deferred tax assets will be fully realized.
The effective tax rates for 1998, 1997 and 1996 were 29.3%, 33.6% and 25.5% re-
spectively. Income tax expense was less than the amount computed by applying
the Federal statutory rate of 35% in 1998 and 1997 and 34% (for companies with
taxable income less than $10 million) in 1996 due to the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at statutory rate $4,672 $7,250 $3,243
Increase (decrease) in taxes resulting from:
Income from obligations of states and political
subdivisions and certain loans not subject to Federal
income taxes (872) (870) (873)
State income taxes 147 430 --
Other, net (40) 152 59
- -------------------------------------------------------------------------------
Total income tax expense $3,907 $6,962 $2,429
- -------------------------------------------------------------------------------
</TABLE>
Note 8. 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 enti-
tled 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.
At December 31, 1998, the Company has reserved for issuance 657,248 shares of
common stock for the Stock Option Plan and 3,920,602 shares of Class A common
stock for conversions of common stock into Class A common stock.
42
First Oak Brook Bancshares, Inc.
<PAGE>
- --------------------------------------------------------------------------------
Payment of dividends by the Company's subsidiary bank is subject to both Fed-
eral 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,
1998, $19,982,000 of undistributed earnings was available for the payment of
dividends by the subsidiary bank without prior regulatory approval.
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 for each period pre-
sented have been restated to reflect the stock split effected in the form of a
dividend.
- --------------------------------------------------------------------------------
Note 9. Regulatory Capital
The Company and its bank subsidiary are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet min-
imum capital requirements can initiate certain mandatory, and possibly addi-
tional discretionary, actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital ad-
equacy 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 as-
sets to ensure capital adequacy. Management believes, as of December 31, 1998
and 1997, 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 following table. As of December 31, 1998 and 1997, the most
recent regulatory notification categorized the bank subsidiary as well capital-
ized. There are no conditions or events since that notification that management
believes have changed the institution's category.
<TABLE>
<CAPTION>
Capital Required To Be
---------------------------------
Adequately
Actual Capitalized Well Capitalized
-------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets)
Consolidated $79,242 10.80% $58,678 8% $ 73,349 10%
Oak Brook Bank 74,724 10.20 58,600 8 73,249 10
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated $74,798 10.20% $29,339 4% $ 44,009 6%
Oak Brook Bank 70,279 9.59 29,300 4 43,950 6
Tier 1 Capital (to Average
Assets)
Consolidated $74,798 7.61% $39,290 4% $ 49,113 5%
Oak Brook Bank 70,279 7.16 39,247 4 49,059 5
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets)
Consolidated $74,317 14.55% $40,867 8% $ 51,084 10%
Oak Brook Bank 67,602 13.25 40,823 8 51,029 10
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated $69,988 13.70% $20,433 4% $ 30,650 6%
Oak Brook Bank 63,273 12.40 20,412 4 30,618 6
Tier 1 Capital (to Average
Assets)
Consolidated $69,988 8.57% $32,650 4% $ 40,812 5%
Oak Brook Bank 63,273 7.76 32,625 4 40,781 5
- ----------------------------------------------------------------------------
</TABLE>
43
First Oak Brook Bancshares, Inc.
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 10. Earnings Per Share
The following table sets forth the computation for basic and diluted earnings
per share for the years ended December 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $9,441,000 $13,753,000 $7,107,000
- -----------------------------------------------------------------------------
Denominator for basic earnings per share-
weighted average shares outstanding 6,649,075 6,583,356 6,729,702
Effect of diluted securities:
Stock options issued to employees and
directors 162,266 194,871 156,536
- -----------------------------------------------------------------------------
Denominator for diluted earnings per share 6,811,341 6,778,227 6,886,238
Earnings per share:
Basic $ 1.42 $ 2.09 $ 1.06
Diluted $ 1.39 $ 2.03 $ 1.03
- -----------------------------------------------------------------------------
</TABLE>
At December 31, 1998 there were on average 5,392 options outstanding that were
not included in diluted earnings per share because their effect would be
antidilutive. There were no such options at December 31, 1997 or 1996.
- --------------------------------------------------------------------------------
Note 11. Contingencies
The Company and its subsidiary bank are not subject to any material pending or
threatened legal actions as of December 31, 1998.
The Company is a party to a revenue sharing agreement in connection with the
sale in 1997 of the Company's credit card portfolio. Under this agreement, the
Company will share the revenue from the sold portfolio for each of the five
twelve month periods beginning July, 1997, subject to a maximum annual payment
of $900,000. Income recognized in accordance with the revenue sharing agreement
amounted to $900,000 in 1998 and $450,000 in 1997.
- --------------------------------------------------------------------------------
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-year vesting for outside directors or a 5-year
vesting schedule for all others 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 "Accounting for Stock-Based Compensation" and has been de-
termined 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 1998, 1997 and 1996, respective-
ly: risk-free interest rates of 5.0%, 5.5% and 6.4%; dividend yields of 2.3%,
3.3% and 3.1%; volatility factor of the expected market price of the Company's
common stock of 30%, 18% and 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. Be-
cause 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 manage-
ment's opinion, the existing models do not necessarily provide a reliable sin-
gle measure of the fair value of its employee stock options.
44
First Oak Brook Bancshares, Inc.
<PAGE>
- -------------------------------------------------------------------------------
For the purposes of pro forma disclosures, the estimated fair value of the op-
tions 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>
1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Net income as reported $9,441 $13,753 $7,107
Pro forma net income $9,324 $13,692 $7,071
Earnings per share as reported:
Basic $ 1.42 $ 2.09 $ 1.06
Diluted $ 1.39 $ 2.03 $ 1.03
Pro forma earnings per share:
Basic $ 1.40 $ 2.08 $ 1.05
Diluted $ 1.37 $ 2.02 $ 1.02
Weighted-average fair value of options granted during
the year: $ 5.82 $ 2.37 $ 2.23
- ----------------------------------------------------------------------------
</TABLE>
A summary of the Company's stock option activity, and related information for
the year ended December 31 follows:
<TABLE>
<CAPTION>
1998 1997 1996
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 416,774 $ 8.48 619,238 $7.02 543,738 $6.03
Granted 54,500 21.42 3,000 13.88 105,002 11.40
Exercised (13,750) 8.00 (185,064) 3.55 (23,502) 2.76
Forfeited (8,900) 12.29 (20,400) 9.90 (6,000) 10.25
- ---------------------------------------------------------------------------------
Outstanding at the end
of the year 448,624 $ 9.99 416,774 $8.48 619,238 $7.02
- ---------------------------------------------------------------------------------
Exercisable at the end
of the year 279,424 $ 7.59 226,694 $6.96 338,088 $4.63
- ---------------------------------------------------------------------------------
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 ranged from
$2.62 to $24.00 per share. The weighted-average remaining contractual life of
those options is 6.3 years.
- -------------------------------------------------------------------------------
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 lia-
bility is 4% of aggregate eligible salaries. For 1998, 1997 and 1996, the
Company's contributions to the plan were $287,000, $255,000, and $246,000, re-
spectively.
The Company also has a profit sharing plan, under which the Company, at its
discretion, could contribute up to the maximum amount deductible for the year.
The Company contributed $172,000 in 1998, $139,000 in 1997 and $128,000 in
1996.
The Company also entered into supplemental pension agreements with certain ex-
ecutive officers. Under these agreements, the Company is obligated to provide
at a prescribed retirement date, a supplemental pension based upon a percent-
age of executive officer's final base salary. For 1998, 1997, and 1996, the
Company's expense for this plan was $162,000, $154,000, and $146,000, respec-
tively.
During 1997, the Company adopted an executive deferred compensation plan. The
purpose of this non-qualified plan is to allow certain executive officers the
opportunity to maximize their elective contributions to the 401(k) savings
plan and provide contributions notwithstanding certain restrictions or limita-
tions in the Internal Revenue Code. The Company's expense for this plan was
$139,000 in 1998 and $37,000 in 1997.
45
First Oak Brook Bancshares, Inc.
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 14. Related Party Transactions
The Company's bank subsidiary has made, and expects in the future to continue
to make, loans to the directors, executive officers and associates of the Bank
and the Company. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated parties and do not involve more than
normal risk of collectibility. The aggregate amount of these loans was
$9,124,000 and $8,145,000 at December 31, 1998 and 1997, respectively. During
1998, new related party loans totaled $2,042,000 and repayments totaled
$1,063,000.
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 periodically enters into loan participations with
Amalgamated Bank of Chicago. At December 31, 1997, the Company had outstanding
loan participations sold of $4,231,000 and no loan participations purchased
from Amalgamated Bank of Chicago. At December 31, 1998, there were no related
party loan participations.
- --------------------------------------------------------------------------------
Note 15. Fair Value of Financial Instruments
Fair Value of Financial Instruments: Statement of Financial Accounting Stan-
dards No. 107, "Disclosures about Fair Value of Financial Instruments," re-
quires the disclosure of the fair value of certain financial instruments. Fair
value of a financial instrument is defined as the amount at which the instru-
ment 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.
Interest-bearing deposits with banks: The fair value of interest-bearing de-
posits with banks is estimated using a discounted cash flow calculation that
utilizes interest rates currently being offered for similar maturities.
Investment securities: Fair values for investment securities are based on
quoted market prices.
Loans: For variable rate loans that reprice frequently and with no signifi-
cant change in credit risk, fair values are based on carrying amounts. The
fair value for all other loans is estimated using discounted cash flow analy-
ses, which use interest rates currently being offered for similar loans of
similar credit quality. The fair value does not include potential premiums
available in a portfolio sale.
Accrued interest receivable: The carrying amounts of accrued interest receiv-
able approximate fair value.
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 esti-
mates 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 esti-
mated using a discounted cash flow calculation that utilizes interest rates
currently being offered for similar maturities.
Federal Home Loan Bank borrowings: The fair value of the Federal Home Loan
Bank borrowings is estimated using a discounted cash flow calculation that
utilizes interest rates currently being offered for similar maturities.
Accrued interest payable: The carrying amounts of accrued interest payable
approximate fair-value.
Off-balance sheet instruments: Fair values for the Company's off-balance
sheet instruments (letters of credit and lending commitments) are generally
based on fees currently charged to enter into similar agreements.
Limitations: The assumptions and estimates used in the fair value determina-
tion process are subjective in nature and involve uncertainties and signifi-
cant judgment and, therefore, fair values cannot be determined with preci-
sion. Changes in assumptions could significantly affect these estimated val-
ues.
46
First Oak Brook Bancshares, Inc.
<PAGE>
- --------------------------------------------------------------------------------
The estimated fair values of the Company's significant financial instruments as
of December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
Carrying Fair Carrying Fair
(Dollars in thousands) Amount Value Amount Value
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and due from banks and federal funds
sold $42,121 $42,121 $32,893 $32,893
Interest-bearing deposits with banks 11,402 11,509 10,239 10,411
Investment securities 297,674 300,401 302,098 305,055
Loans 631,987 633,822 447,332 447,438
Accrued interest receivable 6,636 6,636 6,998 6,998
Financial Liabilities
Time deposits 368,646 372,255 274,778 276,121
Other deposits 409,156 409,156 352,985 352,985
Short-term debt 87,268 87,276 65,116 65,103
Federal Home Loan Bank borrowings 57,500 58,021 42,500 42,348
Accrued interest payable 3,513 3,513 2,924 2,924
Off-balance sheet commitments
Commercial -- 134 -- 90
Home equity -- 81 -- 93
Check credit -- 17 -- 20
- ----------------------------------------------------------------------------
</TABLE>
Note 16. Parent Company Only Financial Information
The following are the condensed balance sheets, statements of income and cash
flows for First Oak Brook Bancshares, Inc.:
Balance Sheets (Parent Company Only)
<TABLE>
<CAPTION>
December 31,
<S> <C> <C>
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------
Assets
Cash and cash equivalents on deposit with subsidiary $ 4,993 $ 7,363
Investment in subsidiary 72,519 64,965
Securities available-for-sale 785 501
Due from subsidiary 588 487
Equipment, net 22 44
Other assets 258 61
- ---------------------------------------------------------------------
Total assets $79,165 $73,421
- ---------------------------------------------------------------------
Liabilities and Shareholders' equity
Other liabilities $ 2,104 $ 1,760
- ---------------------------------------------------------------------
Total liabilities 2,104 1,760
Shareholders' equity 77,061 71,661
- ---------------------------------------------------------------------
Total Liabilities and Shareholders' equity $79,165 $73,421
- ---------------------------------------------------------------------
</TABLE>
47
First Oak Brook Bancshares, Inc.
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Statements of Income (Parent Company Only)
<TABLE>
<CAPTION>
Year Ended December
31,
(Dollars in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiary $5,425 $ 5,094 $2,108
Other income 1,060 1,067 2,140
- -----------------------------------------------------------------------------
Total income 6,485 6,161 4,248
- -----------------------------------------------------------------------------
Expenses:
Other expenses 2,158 2,978 2,740
- -----------------------------------------------------------------------------
Total expenses 2,158 2,978 2,740
- -----------------------------------------------------------------------------
Income before income taxes and equity in undistributed
net income of subsidiary 4,327 3,183 1,508
Income tax benefit 363 753 186
- -----------------------------------------------------------------------------
Income before equity in undistributed net income of
subsidiary 4,690 3,936 1,694
Equity in undistributed net income of subsidiary 4,751 9,817 5,413
- -----------------------------------------------------------------------------
Net income $9,441 $13,753 $7,107
- -----------------------------------------------------------------------------
</TABLE>
Statements of Cash Flows (Parent Company Only)
<TABLE>
<CAPTION>
Year Ended December
31,
(Dollars in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $9,441 $13,753 $7,107
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 27 27 43
Investment securities losses -- -- 7
Decrease (increase) in other assets (299) (39) 22
Increase in other liabilities 332 599 371
Decrease (increase) in due from subsidiary (101) (391) 714
Equity in undistributed net income of subsidiary (4,751) (9,817) (5,413)
Amortization of intangible assets 29 43 70
Other 115 75 (48)
- -------------------------------------------------------------------------------
Net cash provided by operating activities 4,793 4,250 2,873
Cash flows from investing activities:
Purchases of available-for-sale securities (488) (248) (7,157)
Sales of available-for-sale securities 240 1,493 7,125
Additions to equipment (5) -- (38)
- -------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (253) 1,245 (70)
Cash flows from financing activities:
Exercise of stock options 176 1,510 128
Purchase of treasury stock (2,554) (2,815) (37)
Cash dividends (2,282) (1,711) (1,324)
Capital contribution to subsidiary (2,250) (2,000) --
- -------------------------------------------------------------------------------
Net cash used in financing activities (6,910) (5,016) (1,233)
Net increase (decrease) in cash and cash equivalents (2,370) 479 1,570
Cash and cash equivalents at beginning of year 7,363 6,884 5,314
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of year $4,993 $ 7,363 $6,884
- -------------------------------------------------------------------------------
</TABLE>
48
First Oak Brook Bancshares, Inc.
<PAGE>
Corporate and Shareholder Information
- --------------------------------------------------------------------------------
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.
Stuart I. Greenbaum, Dean of Olin School of Business, Washington University
Michael L. Stein, Executive Vice President and Director, Brownson, Rehmus, &
Foxworth, Inc. (Financial counseling)
Geoffrey R. Stone, Provost of the University of Chicago
Robert M. Wrobel, President, Amalgamated Bank of Chicago
Senior Corporate Officers
Rosemarie Bouman, Vice President and Chief Financial Officer
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
- --------------------------------------------------------------------------------
Class A Common Stock
The Company's Class A Common Stock is listed on The Nasdaq Stock Market(R). As
of January 31, 1999, there were approximately 170 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
ABN AMRO Inc.; Everen Securities, Inc. and Howe Barnes Investments, Inc.
- --------------------------------------------------------------------------------
Corporate Office
The Corporate Office is located at 1400 Sixteenth Street, Oak Brook, Illinois
60523. The telephone number is (630) 571-1050. You can e-mail us at
[email protected].
- --------------------------------------------------------------------------------
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 60523.
- --------------------------------------------------------------------------------
Annual Meeting
The Annual Meeting of Shareholders will be held at 10 a.m. on Tuesday, May 4,
1999, in the Conference Center at 1400 Sixteenth Street, Oak Brook, Illinois
60523.
Common Stock
The Company's Common Stock is traded in the over-the-counter market through
market makers. As of January 31, 1999, there were approximately 187 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, 1999, a total of 2,103,206 shares of Common
Stock have been converted into Class A Common Stock.
- --------------------------------------------------------------------------------
Form 10-K
Any individual requesting a copy of the Company's 1998 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 1998 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.
First Oak Brook Bancshares, Inc.
<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 (23.1)
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
First Oak Brook Banchares, Inc.:
We consent to incorporation by reference in the registration statements (No.'s
333-24145, 333-82800, 333-75025) on Form S-8 of First Oak Brook Bancshares,
Inc., of our report dated February 5, 1999, relating to the consolidated balance
sheet of First Oak Brook Bancshares, Inc. and subsidiary as of December 31,
1998, and the related statements of income, changes in stockholders' equity and
cash flows for the year then ended, which report appears in the December 31,
1998 annual report on Form 10-K of First Oak Brook Bancshares, Inc.
KPMG LLP
Chicago, Illinois
March 29, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We 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, the Registration Statement (Form S-8 No. 33-
82800) pertaining to First Oak Brook Bancshares, Inc. 1987 Stock Option Plan and
the Registration Statement (Form S-8 No. 333-75025) pertaining to First Oak
Brook Bancshares, Inc. Amended and Restated 1987 Stock Option Plan of our report
dated January 20, 1998, with respect to the consolidated financial statements of
First Oak Brook Bancshares, Inc. included in this Annual Report (Form 10-K) for
the year ended December 31, 1998.
Ernst & Young LLP
Chicago, Illinois
March 26, 1999
<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> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 41,759 32,893
<INT-BEARING-DEPOSITS> 11,402 10,239
<FED-FUNDS-SOLD> 362 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 156,421 159,416
<INVESTMENTS-CARRYING> 141,253 142,682
<INVESTMENTS-MARKET> 143,980 145,639
<LOANS> 631,987 447,332
<ALLOWANCE> 4,445 4,329
<TOTAL-ASSETS> 1,009,275 816,144
<DEPOSITS> 777,802 627,763
<SHORT-TERM> 87,268 92,616
<LIABILITIES-OTHER> 9,644 9,104
<LONG-TERM> 57,500 15,000
0 0
0 0
<COMMON> 14,567 14,542
<OTHER-SE> 62,494 57,119
<TOTAL-LIABILITIES-AND-EQUITY> 1,009,275 816,144
<INTEREST-LOAN> 40,811 36,305
<INTEREST-INVEST> 18,015 17,560
<INTEREST-OTHER> 2,870 822
<INTEREST-TOTAL> 61,696 54,687
<INTEREST-DEPOSIT> 27,029 23,373
<INTEREST-EXPENSE> 33,286 27,255
<INTEREST-INCOME-NET> 28,410 27,432
<LOAN-LOSSES> 630 1,550
<SECURITIES-GAINS> 79 (9)
<EXPENSE-OTHER> 22,423 20,708
<INCOME-PRETAX> 13,348 20,715
<INCOME-PRE-EXTRAORDINARY> 13,348 20,715
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 9,441 13,753
<EPS-PRIMARY> 1.42 2.09
<EPS-DILUTED> 1.39 2.03
<YIELD-ACTUAL> 3.43 3.97
<LOANS-NON> 0 0
<LOANS-PAST> 272 378
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 4,329 4,109
<CHARGE-OFFS> 729 1,505
<RECOVERIES> 215 175
<ALLOWANCE-CLOSE> 4,445 4,329
<ALLOWANCE-DOMESTIC> 4,445 4,329
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
<PAGE>
EXHIBIT (99)
Report of Independent Auditors
Board of Directors and Shareholders
First Oak Brook Bancshares, Inc.
We have audited the accompanying consolidated balance sheet of First Oak Brook
Bancshares, Inc. and subsidiary as of December 31, 1997, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the two years in the period ended December 31, 1997. 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, 1997 and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 20, 1998
