ITEM 1: BUSINESS
UPBANCORP, INC.
Upbancorp, Inc. ("Upbancorp" or the "Company") is a multi-bank holding company organized in 1983 under the laws of the State of Delaware. Upbancorp owns all the outstanding common stock of Uptown National Bank of Chicago ("Uptown"), organized in 1929 and located in Chicago, Illinois, and Heritage Bank ("Heritage"), organized in 1977 and located in Phoenix, Arizona. (Uptown and Heritage are referred to as the "Subsidiary Banks".) Upbancorp does not engage in any activities other than providing administrative services and acting as a holding company for its Subsidiary Banks.
The Company is a banking company with total assets of $226 million at year- end 1996 and is headquartered in Chicago, Illinois. The majority of the operational responsibilities of each of the Subsidiary Banks rests with their Officers and Directors.
The Company and its Subsidiary Banks employed approximately 145 full-time equivalent employees at December 31, 1996.
SUBSIDIARY BANKS
The Company's affiliates consist of two full-service community banks, which operate five banking offices in northern Chicago and metropolitan Phoenix. Approximately 77% of its banking assets are related to Uptown with the remainder related to Heritage.
Both Subsidiary Banks are engaged in the general commercial banking business in addition to offering a complete range of retail banking services. The Subsidiary Banks conduct a general banking business which embraces all of the usual functions, both commercial and consumer, and which they may lawfully provide, including, but not limited to: the acceptance of deposits to demand, savings and time accounts and the servicing of such accounts; commercial, industrial, consumer and real estate lending; safe deposit box operations; and other banking services tailored for both commercial and retail clients.
Uptown has one wholly-owned subsidiary, Broadway Clark Building Corporation ("BCBC"), which is an Illinois corporation. BCBC owns all of the real estate that is used in connection with the operation of Uptown's business with the exception of one facility, which is leased.
SUPERVISION AND REGULATION
The Company and its Subsidiary Banks are subject to regulation and supervision by various governmental regulatory authorities including, but not limited to, the Federal Reserve Board (the "FRB"), the Office of the Comptroller of the Currency (the "OCC"), the Federal Deposit Insurance Corporation (the "FDIC"), the Arizona State Banking Department, the Securities and Exchange Commission (the "SEC"), the Internal Revenue Service and state taxing authorities. Financial institutions and their holding companies are extensively regulated under federal and state law. The effect of such statutes, regulations and policies can be significant and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial institutions, such as the Company and the Subsidiary Banks, regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. This supervision and regulation is intended primarily for the protection of the FDIC's Bank Insurance Fund and the depositors, rather than the shareholders of financial institutions.
The Company is subject to supervision and regulation by the Board of Governors of the FRB, under the Bank Holding Company Act of 1956, as amended.
Uptown is chartered under the National Bank Act, as amended, and is subject to the examination, supervision, reporting and enforcement requirements of the OCC, as the chartering authority for national banks, and the FDIC as the administrator of the Bank Insurance Fund. The Bank is a member of the Federal Reserve System.
Heritage is chartered under the banking laws of Arizona and is subject to the examination, supervision, reporting and enforcement requirements of the Arizona State Banking Commission under the banking laws of Arizona and the FDIC under the Federal Deposit Insurance Act, as amended.
The deposits of the Subsidiary Banks are insured by the Bank Insurance Fund of the FDIC to the extent permitted by law.
The Company's common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Consequently, the Company is subject to the information proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Securities Exchange Act of 1934.
GOVERNMENTAL MONETARY POLICIES AND ECONOMIC CONDITIONS
The earnings of the Company are affected in important respects by general economic conditions and also by the fiscal and monetary policies of the federal government and its agencies. In particular, the FRB regulates the national supply of bank credit in order to achieve, among other things, maximum employment and a stable price level. Among the instruments of monetary policy used by the FRB to implement these objectives are: open market transactions in United States government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth of bank loans, investments, and deposits, and they may also affect interest rates charged on loans or paid for deposits.
Interest rate sensitivity has a major impact on the yields earned on assets of the Subsidiary Banks. As market rates change, yields earned on assets may not necessarily move to the same degree as rates paid on liabilities. For this reason, the Subsidiary Banks attempt to minimize earnings volatility related to fluctuations in interest rates through the use of formal asset/liability management programs which identifies imbalances between the repricing of earning assets and funding sources, among other things.
In addition to the FRB, the Company's earnings are also affected by the FDIC insurance premiums and the annual fees charged by the various regulatory authorities. The Company cannot fully predict the nature or the extent of any effect which such fiscal and monetary policies may have on its business and earnings.
COMPETITION
The principal methods of competition between commercial banks is generally expressed in terms of price, including interest rates paid on deposits and interest rates charged on borrowings, fees charged on fiduciary services, quality of services to customers, ease of access to services, and the offering of additional services. More recently, technological advances such as telebanking, point-of-sale debit cards and electronic data interchange have also resulted in intensified competition with traditional banking distribution systems.
Both Illinois and Arizona are highly competitive markets for banking and related financial services. Since these areas are the Company's primary focus markets, the Subsidiary Banks are exposed to varying types and levels of competition. In general, each Subsidiary Bank competes, anticipates and responds within each individual market area. Both Subsidiary Banks compete and rely heavily on the high level of quality service provided to our customers. The Company has seen the level of competition and number of competitors in its market places increase in recent years and expects a continuation of these competitive market conditions.
CAPITAL GUIDELINES
The FRB, the OCC and the FDIC have adopted risk-based capital guidelines which provide a framework for assessing the adequacy of the capital of banks and bank holding companies (collectively "banking institutions"). These guidelines apply to all banking institutions regardless of size and are used in the examination and supervisory process as well as in the analysis of applications to be acted upon by the regulatory authorities. These guidelines require banking institutions to maintain capital based on the credit risk of their operations.
The risk-based capital guidelines are designed to require the maintenance of capital commensurate with both on and off-balance sheet credit risks. The minimum ratios established by the guidelines are based on both tier 1 and total capital to total risk-based assets. Total risk-based assets are calculated by assigning each on-balance sheet asset and off-balance sheet item to one of four risk categories depending on the nature of each item. The amount of the items in each category is then multiplied by the risk-weight assigned to that category (0%, 20%, 50% or 100%). Total risk-based assets equals the sum of the resulting amounts. Tier 1 capital is generally defined as shareholders' equity less intangible assets and total capital is generally defined to include Tier 1 capital plus limited levels of the allowance for loan losses.
In addition to the risk-based capital requirements, the FRB, the OCC and the FDIC require institutions to maintain a minimum leveraged-capital ratio to supplement the risk-based capital guidelines. The leverage ratio is intended to ensure that adequate capital is maintained against risks other than credit risk.
The Company and the Subsidiary Banks exceed the minimum required capital guidelines for both risk-based capital ratios and the leverage ratio at December 31, 1996. A further discussion of the capital guidelines is included in the Capital Resources section under Item 7 of this Form 10-K.
DIVIDENDS
GENERAL
In addition to the capital guidelines provided in the discussion above, there are various national and state banking regulations which limit the ability of the Subsidiary Banks to pay dividends and thereby limiting the ability of the Company to pay dividends. Since the Company is a legal entity, separate and distinct from its affiliates, its dividends are not subject to such bank regulatory guidelines. The holders of the Company's common stock are entitled to receive such dividends as are declared by the Board of Directors. For a further discussion of dividends, see footnote 12 "Restrictions on Retained Earnings" in the Notes to Consolidated Financial Statements found elsewhere in this Form 10-K.
NATIONAL BANKING ASSOCIATION RESTRICTIONS
Uptown is a national banking association, and is limited with respect to the amount of dividends which they can pay to their shareholders under Sections 56 and 60 of the National Bank Act.
Section 56 restricts a national bank from paying dividends if it would impair the institution's capital by barring any payments in excess of "net profits then on hand". Section 56 further requires that a bank deduct losses and bad debts from "net profits then on hand". It also specifies that a portion of a bank's capital surplus account may be included as "net profits then on hand" to the extent that it represents earnings from prior periods.
Section 60 requires the OCC's approval if the total of all dividends declared in any calendar year will exceed the institution's net profits of that year combined with its retained net profits of the preceding two years, less any required transfers to surplus. In calculating its net profits under Section 60 a national bank may not add back provisions made to its allowance for loan losses nor deduct net charge-offs.
ARIZONA STATE-CHARTERED BANK RESTRICTIONS
Under the provisions of the Arizona Bank Code, dividends may not be declared by state-chartered banks unless they are made in compliance within the banking laws of Arizona. Additionally, the payment of dividends by a state- chartered bank whose deposits are insured by the Bank Insurance Fund, is affected by the requirement to maintain minimum capital pursuant to the capital adequacy guidelines issued by the FDIC.
ITEM 2:
ITEM 2: PROPERTIES
The following table summarizes the Company and Subsidiary Banks' properties by location:
AFFILIATE PROPERTY TYPE/LOCATION OWNERSHIP SQUARE FOOTAGE
THE COMPANY 4753 N. Broadway - - Chicago, Illinois
UPTOWN Main Office: 4753 N. Broadway Owned 149,000 (Note 1) Chicago, Illinois
Banking Office: 6041 N. Clark Street Owned 2,100 (Note 1) Chicago, Illinois
Banking Office: 5345 N. Sheridan Road Leased 1,500 Chicago, Illinois
HERITAGE Main Office: 4222 E. Camelback Road Leased 4,000 Suite J200 Phoenix, Arizona
Banking Office: 4222 E. Camelback Road Leased 4,000 Suite J100 Phoenix, Arizona
Banking Office: 1333 W. Broadway Owned 13,900 (Note 2) Tempe, Arizona
Franklin Mortgage Office: 4222 E. Camelback Road Leased 1,641 Suite H200 Phoenix, Arizona
In addition to the banking locations listed above, the Subsidiary Banks own 12 automatic teller machines, strategically located within the subsidiaries' market places.
At December 31, 1996, the properties and equipment of the Company had an aggregate net book value of approximately $5.5 million.
Note 1: Uptown's locations are owned by its wholly-owned subsidiary, BCBC. Uptown utilizes approximately 49,000 square feet of its main office and the rest of the facility is leased out by BCBC to independent third parties.
Note 2: Heritage leases approximately 3,130 square feet of its Tempe location to an independent third party.
ITEM 3:
ITEM 3: LEGAL PROCEEDINGS
Neither the Company nor its Subsidiary Banks are party to any litigation, which in the judgment of management after consultation with counsel, would have a material effect on the financial position or results of operations of the Company or the Subsidiary Banks.
ITEM 4:
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no items submitted to a vote of security holders during the fourth quarter of 1996.
PART II
ITEM 5:
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Over-The-Counter market under the symbol UPBN. As of December 31, 1996, there were 356 shareholders of record. The following table sets forth common stock information during each quarter of 1996 and 1995.
A discussion regarding the regulatory restrictions applicable to the Subsidiary Banks' ability to pay dividends is included in the Dividends Section under Item 1 of this Form 10-K and footnote 12 in the Notes to Consolidated Financial Statements found elsewhere in this Form 10-K.
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA
The following Selected Financial Data is not included by the report of independent public accountants and should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this Form 10-K. A more detailed discussion and analysis of factors affecting the Company's financial position and operating results is presented in Management's Discussion and Analysis of Financial Condition and Results of Operations found under Item 7
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following management's discussion and analysis of financial condition and results of operations should be read in conjunction with the Company's Consolidated Financial Statements and Notes to Consolidated Financial Statements presented in Item 8
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
UPBANCORP, INC. CONSOLIDATED STATEMENTS OF CONDITION
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
UPBANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
UPBANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOW
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
UPBANCORP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DOLLARS IN THOUSAND, EXCEPT PER SHARE DATA)
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
UPBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
Upbancorp, Inc. ("Upbancorp" or the "Company"), is a multi-bank holding company, organized in 1983 under the laws of the State of Delaware. The Company owns all of the outstanding common stock of Uptown National Bank of Chicago ("Uptown"), organized in 1929 and located in Chicago, Illinois and Heritage Bank ("Heritage"), organized in 1977 and located in Phoenix, Arizona. Upbancorp does not engage in any activities other than providing administrative services and acting as a holding company for its subsidiary banks.
The Company's affiliates consist of two full-service community banks, which operate five banking offices in northern Chicago and metropolitan Phoenix. Both Subsidiary Banks are engaged in the general commercial banking business in addition to offering a complete range of retail banking services. The Subsidiary Banks conduct general banking business which embraces all of the usual function, both commercial and consumer, and which they may lawfully provide, including, but not limited to: the acceptance of deposits to demand, savings, and time accounts and the servicing of such accounts; commercial, industrial, consumer and real estate lending; collections; safe deposit box operations; and other banking services tailored for both commercial and retail clients.
Uptown's wholly-owned subsidiary, Broadway Clark Building Corporation ("BCBC"), is an Illinois corporation and owns all of the real estate that is used in connection with the operation of Uptown's business with the exception of one facility.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Upbancorp and its wholly-owned subsidiaries Uptown (including its wholly-owned subsidiary BCBC) and Heritage after elimination of all intercompany balances and transactions.
BASIS OF FINANCIAL STATEMENT PRESENTATION:
The accounting and reporting policies of the Company conform to generally accepted accounting principles. In preparing the accompanying consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and the accompanying notes. Significant estimates which are particularly susceptible to change in a short period of time include the determination of the allowance for loan losses. Actual results could differ from those estimates.
Certain reclassifications have been made to the 1995 and 1994 consolidated financial statements to conform to the 1996 presentation.
SECURITIES HELD-TO-MATURITY:
Debt securities for which the Banks have both the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. Amortization of premiums and accretion of discounts, computed by the interest method over their contractual lives, is included in interest income.
SECURITIES AVAILABLE-FOR-SALE:
Securities classified as available-for-sale are those debt securities that the Banks intend to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Bank's assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors.
Securities available-for-sale are reported at fair value with unrealized gains or losses reported as a separate component of shareholders' equity net of the related deferred tax effect. The amortization of premiums and accretion of discounts, computed by the interest method over their contractual lives, are recognized in interest income.
Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings.
Declines in the fair value of individual securities classified as either held-to-maturity or available-for-sale below their amortized cost that are determined to be other than temporary result in write-downs of the individual securities to their fair value with the resulting write-downs included in current earnings as realized losses.
MORTGAGES HELD-FOR-SALE:
The Company routinely sells to investors its originated residential mortgage loans and retains no servicing rights relating to these mortgages sold. Mortgage activity includes both mortgages held-for-sale with pre-purchase agreements, and loans sold directly into the secondary market. Mortgages held-for-sale are carried at cost with interest income recognized until sold. Mortgage banking fees are recorded at the date of sale. For purposes of this report, mortgages held-for-sale and mortgage banking fees relate only to these two types of mortgage activities; not to mortgages which are originated, booked and serviced by the Company. All sales are made without recourse.
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES:
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances reduced by any charge-offs or specific valuation accounts and net of unearned discount, deferred loan fees and the allowance for loan losses.
Loan origination and commitment fees are deferred and the net amount is amortized as an adjustment of the loan yield over the contractual life of the related loans. Commitment fees based upon a percentage of a customer's unused line of credit and fees related to standby letters of credit are recognized over the commitment period.
Unearned interest on discounted loans is amortized to income over the life of the loans, using the sum-of-month's digits method which approximates the level yield method. For all other loans, interest is accrued daily on the outstanding balances. The accrual of interest is discontinued on loans past due 90 days or more. For impaired loans, accrual of interest is discontinued when management believes, after considering collection efforts and other factors, that the borrower's financial condition is such that collection of interest is doubtful. Interest income on these loans is recognized to the extent interest payments are received and the principal is considered fully collectible.
A loan is impaired when it is probable the Bank will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment, as well as any subsequent changes, is recorded through a valuation allowance included in the allowance for loan losses.
The Company considers consumer loans and residential real estate loans to be smaller homogeneous loans that are not considered as impaired loans. All other loan types are accounted for as impaired loans when they meet the above criteria.
The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated losses on existing loans, based on an evaluation of the collectibility of loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower's ability to pay. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, various regulatory agencies periodically review the allowance for loan losses based on their judgments of collectibility after reviewing the information available to them at the time of their examination.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally by the straight-line method over their estimated useful lives.
GOODWILL:
Goodwill arising from the acquisition of Heritage Bank is being amortized on a straight-line basis through 2002. As of December 31, 1996 and 1995, goodwill of $276 and $318, net of accumulated amortization, is included in other assets in the consolidation statements of condition.
INCOME TAXES:
Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD: The carrying amounts reported in the balance sheet for cash and due from banks and federal funds sold approximate their fair values.
SECURITIES HELD-TO-MATURITY AND AVAILABLE-FOR-SALE: Fair values of securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
LOANS AND MORTGAGES HELD-FOR-SALE: The fair values of the loan portfolio are estimated based upon discounted cash flow analyses that apply using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.
DEPOSIT LIABILITIES: The fair values disclosed for deposits with no defined maturities is equal to their carrying amounts which represent the amount payable on demand. The carrying amounts for variable-rate, fixed- term money market accounts and certificates of deposit approximate their fair value at the reporting date. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
BORROWED FUNDS: The carrying amounts of borrowings under repurchase agreements and other short-term borrowings approximate their fair values.
ACCRUED INTEREST: The carrying amounts of accrued interest approximate their fair values.
OFF-BALANCE SHEET INSTRUMENTS: Fair values for the Company's off-balance sheet lending commitments (letters of credit and commitments to extend credit) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value for such committments is nominal.
EARNINGS PER COMMON SHARE:
Earnings per common share are determined on the basis of the weighted- average number of common shares outstanding.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES:
In June, 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 125 ("SFAS 125") "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities". SFAS 125 requires that an entity recognize only those assets that it controls and liabilities it has incurred. Assets should be recognized until control has been surrendered, and liabilities should be recognized until they have been extinguished. Recognition of financial assets and liabilities will not be affected by the sequence of the transactions unless the effect of the transactions is to maintain effective control over a transferred financial asset.
SFAS 125 is effective for transactions occurring after December 31, 1996, except for transactions relating to secured borrowings and collateral for which the effective date is December 31, 1997. The Company believes the adoption of SFAS 125 will not have a material impact on its consolidated financial statements.
NOTE 2. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Banks are required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The total of these reserve balances was approximately $1,981 and $1,892 at December 31, 1996 and 1995.
NOTE 3. SECURITIES
The amortized cost and fair value of securities HELD-TO-MATURITY are as follows at December 31:
The amortized cost and fair value of securities AVAILABLE-FOR-SALE are as follows at December 31:
The amortized cost and fair value of securities AVAILABLE-FOR-SALE at December 31, 1996, by contractual maturity, are shown below. Expected maturities in mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be called or repaid with or without prepayment penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary.
Amoritzed Fair Cost Value ------------- ----------- Due in one year or less $ 13,740 $ 13,539 Due after one year through five years 19,278 19,001 Due after five years through ten years 3,427 3,462 Due after ten years 912 923 Equity securities 3,273 3,259 Mortgage-backed securities 26,191 25,672 ------------- ----------- Total $ 66,821 $ 65,856 ------------- ----------- ------------- -----------
Investment securities carried at approximately $22,976 and $11,061 at December 31, 1996 and 1995, respectively, were pledged to secure public and trust deposits and for other purposes as required or permitted by law.
During 1995, the Financial Accounting Standards Board decided to allow all enterprises to make a reassessment of the classifications of securities made under SFAS 115. The Company transferred the majority of its securities in the held-to-maturity classification to securities available-for-sale.
NOTE 4. LOANS Major classifications of loans are as follows at December 31:
The commerical loan maturities and sensitivity to changes in interest rates at December 31, 1996, are shown in the following table:
After on In one year through Over or less five years five years Total ----------- ---------- ----------- --------- Comemrical loan maturities $ 49,678 $ 31,933 $ 9,134 $ 90,745 ----------- ---------- ----------- --------- ----------- ---------- ----------- --------- Interest rate sensitivity: Fixed rate $ 11,238 $ 31,933 $ 9,134 $ 52,305 Variable rate 38,440 -- -- 38,440 ----------- ---------- ----------- --------- Total $ 49,678 $ 31,933 $ 9,134 $ 90,745 ----------- ---------- ----------- --------- ----------- ---------- ----------- ---------
Transactions in the allowance for loan losses account during the years ended December 31, 1996, 1995 and 1994 are summarized below:
December 31, -------------------------------- 1996 1995 1994 -------- -------- -------- Balance at beginning of year $ 1,402 $ 1,605 $ 1,421 Provision for loan losses 914 717 291 Loans charged-off (896) (948) (206) Recoveries on loans previously charged-off 65 28 99 ---------- ----------- --------- Balance at end of year $ 1,485 $ 1,402 $ 1,605 ---------- ----------- --------- ---------- ----------- ---------
As of December 31, 1996 and 1995, the Company's recorded investment in impaired loans and the related valuation allowance calculated under SFAS No. 114 and No. 118 are as follows:
1996 1995 -------------------- -------------------- Carrying Valuation Carrying Valuation Value Allowance Value Allowance -------- --------- ---------- --------- Impaired loans Valuation allowance required $ 411 $ 94 $ 1,581 $ 261 No valuation allowance required 400 - 788 - -------- --------- ---------- --------- Total Impaired Loans $ 811 $ 94 $ 2,369 $ 261 -------- --------- ---------- --------- -------- --------- ---------- ---------
The valuation allowance is included in the allowance for loan losses on the balance sheet. The average recorded investment in impaired loans for years-ended December 31, 1996 and 1995, was $1,878 and $4,025.
NOTE 5. PREMISES AND EQUIPMENT
The following is a summary of bank premises and equipment at December 31:
1996 1995 --------- --------- Land $ 1,106 $ 1,106 Buildings and improvements 11,629 10,852 Furniture, fixtures and equipment 5,532 5,751 --------- --------- Total cost 18,267 17,709 Accumulated depreciation (12,766) (11,929) --------- --------- Net book value $ 5,501 $ 5,780 --------- --------- --------- ---------
Depreciation expense on premises and equipment totaled $887, $924, and $972 for 1996, 1995 and 1994.
The buildings, in which the main facilities of each bank are located, have stores and offices which are rented. Gross rental receipts were $952 in 1996, $908 in 1995 and $858 in 1994 and are recorded as a reduction of net occupancy expense.
NOTE 6. DEPOSITS
The aggregate amount of certificates of deposits of $100,000 or more totaled $12,584 and $11,910 at December 31, 1996 and 1995.
Maturities of time certificates of deposit are summarized as follows at December 31:
----------- 1997 $ 41,218 1998 8,739 1999 3,809 2000 790 2001 218 Thereafter - ----------- $ 54,774 ----------- -----------
NOTE 7. BORROWED FUNDS
Borrowed funds consisted of the following at December 31:
1996 1995 ----------- ---------- Federal Home Loan Bank borrowing, due July 1, 1996, variable rate $ - $ 5,000 Federal Home Loan Bank borrowing, due February 14, 1997, 5.83% fixed rate 2,000 - Federal Home Loan Bank borrowing, due July 1, 1998, variable rate 5,000 - Securities sold under agreements to repurchase and U.S. Treasury tax and loan note accounts 3,561 230 ----------- ---------- Total $ 10,561 $ 5,230 ----------- ---------- ----------- ----------
Uptown has an arrangement with the Federal Home Loan Bank of Chicago whereby the FHLB will make advances to the Bank with repayment terms from overnight to ten years. The Bank is eligible to obtain credit up to 20 times the member Bank's holding of Federal Home Loan Capital Stock; these eligible borrowings amount to $19,438. As required under the agreement, the advances can be collateralized by the following: qualifying 1-4 first mortgages, private mortgage-backed securities or U.S. Treasury and Agency obligations. Uptown has pledged a combination of U.S. Treasury and Agency mortgage-backed securities. Heritage has an arrangement with the Federal Home Loan Bank of San Francisco whereby the FHLB will make advances to the Bank with repayment terms from overnight to ten years but not to exceed the volume of its residential housing financial assets. The Bank is eligible to obtain credit up to 20 percent of the Bank's assets; these eligible borrowings amounted to $9,350 at December 31, 1996.
NOTE 8. PENSION PLAN
Uptown has a defined benefit plan covering substantially all employees in the Company. The plan is based on years of service and the employee's average compensation during all years of employment. The Company's funding policy is to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974 ("ERISA"), plus additional amounts as appropriate. The following table sets forth the Plan's funded status for the periods noted:
NOTE 9. INCOME TAXES
The provision for income taxes is comprised of the following amounts for the years ended December 31:
1996 1995 1994 ------- ------- ------- Current: Federal $ 470 $ 499 $ 307 State 60 81 - Deferred: 163 45 (61) ------- ------- ------- Total tax provision $ 693 $ 625 $ 246 ------- ------- ------- ------- ------- -------
The components of the net deferred tax assets are as follows:
The Bank has recorded a net deferred tax asset of $854, $887 and $1,279 as of December 31, 1996, 1995 and 1994, respectively, which is included in the balance sheet line item entitled "Other Assets."
Management has determined that a valuation allowance is not required at December 31, 1996 and 1995.
The following table reconciles the statutory Federal income tax rate with the effective income tax as a percent of pretax income.
1996 1995 1994 ------ ------- ------- Statutory income tax rate 34.0% 34.0% 34.0% Reduction/increase in taxes resulting from Tax-exempt interest (2.2%) (1.7%) (6.3%) State tax 2.1% 2.2% (1.3%) Non-deductible expenses 3.6% 3.5% (3.0%) ------ ------- ------- Effective income tax rate 37.5% 38.0% 23.4% ------ ------- ------- ------ ------- -------
NOTE 10. RELATED PARTIES
The Banks have entered into transactions with their directors and their affiliates (related parties). The aggregate amount of loans to such related parties at December 31, 1996 and 1995 was $2,716 and $2,925, respectively. During 1996, new loans and advances to such related parties amounted to $957 and repayments amounted to $1,166.
NOTE 11. COMMITMENTS, CONTINGENCIES AND CREDIT RISK
The Subsidiary Banks are parties to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of these instruments reflect the extent of involvement a bank has in particular classes of financial instruments.
The Banks' exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and standby and commercial letters of credit is presented by the contractual amount of those instruments. The Banks use the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Banks evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Banks upon extension of credit is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, marketable securities, inventory, property, plant, and equipment, and income-producing commercial properties and residential properties.
Standby letters of credit are conditional commitments issued by the Banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Banks hold various types of collateral (primarily certificates of deposit) to support those commitments for which collateral is deemed necessary. Most of the letters of credit expire within twelve months.
Contract Amount ------------------------- Off - balance sheet assets 1996 1995 ---------- ---------- Commitments to extend credit $ 53,577 $ 33,589 Letters of credit: Standby 752 620 Commercial 358 950
Upbancorp leases certain office facilities and equipment under various operating lease agreements that provide for payment of taxes, insurance and maintenance costs. These leases generally include renewal options. The future minimum rental commitments at December 31, 1996 are as follows:
Premises Equipment Total ---------- ------------ ---------- 1997 $ 178 $ 74 $ 252 1998 181 -- 181 1999 179 -- 179 2000 161 -- 161 2001 162 -- 162 Thereafter 250 -- 250 ---------- ------------ ---------- Total minimum payments $ 1,111 $ 74 $ 1,185 ---------- ------------ ---------- ---------- ------------ ----------
In the ordinary course of business, the Banks have various outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements. In addition, the Company and the Banks are defendants in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial condition of the Company.
In addition to financial instruments with off-balance-sheet risk, the Company, to a certain extent, is exposed to varying risks associated with concentrations of credit. Concentrations of credit risk generally exist if a number of counterparties are engaged in similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by economic or other conditions.
The Company conducts substantially all of its lending activities throughout northeastern Illinois and the greater Phoenix metropolitan area. As of December 31, 1996, loans to customers in Arizona were approximately $44 million. Loans granted to businesses are primarily secured by business assets, owner-occupied real estate or personal assets of commercial borrowers. Loans to individuals are primarily secured by automobiles, residential real estate or other personal assets. Since the Company's borrowers and its loan collateral have geographic concentration in the greater Chicago and greater Phoenix metropolitan areas, the Company could have exposure to a decline in those local economies and real estate markets. However, management believes that the diversity of its customer base and local economies, its knowledge of the local markets, and its proximity to customers limits the risk of exposure to adverse economic conditions.
NOTE 12. RESTRICTIONS ON RETAINED EARNINGS
Uptown and Heritage are subject to certain restrictions on the amount of dividends that they may declare without prior regulatory approval. At December 31, 1996, approximately $1,249 of retained earnings of Uptown were available for dividend declaration without prior regulatory approval.
NOTE 13. REGULATORY MATTERS
The Company and the Banks are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - action by regulators that, if undertaken could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that involve qualitative measures of the Company's and the Banks' assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and the Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes the Company and the Banks meet all capital adequacy requirements to which they are subject to at December 31, 1996.
As of December 31, 1996, the most recent notification from the Office of the Comptroller of the Currency categorized Uptown as well capitalized and notification from the Federal Deposit Insurance Corporation categorized Heritage as adequately capitalized under the regulatory framework for prompt corrective action. As a result of this designation, Heritage is currently paying F.D.I.C. premiums at a rate of .04/$100 in deposits. To be categorized as well capitalized, the Banks must maintain minimum total risk-based, Tier 1 risk based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed either Banks' category.
The Company's ratios are presented in the following table:
NOTE 14. FINANCIAL INSTRUMENTS
The estimated fair values of the Banks' financial instruments were as follows at December 31,
NOTE 15. UPBANCORP, INC. - PARENT ONLY FINANCIAL STATEMENTS
The Parent Company's condensed financial information, which follows, conforms with the accounting policies described in the preceding notes:
STATEMENTS OF CONDITION
December 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 - ------------------------------------------------------------------------------- ASSETS Cash $ 381 $ 140 Investment in subsidiary banks 18,441 18,317 Other 155 100 ------- ------- TOTAL ASSETS $18,977 $18,557 ------- ------- ------- -------
LIABILITIES Dividend declared $ 110 $ 111 Other liabilities 11 12 ------- ------- TOTAL LIABILITIES $ 121 $ 123 ------- -------
SHAREHOLDERS' EQUITY Common stock - $10 par value $ 2,500 $ 2,500 Additional paid in capital 3,000 3,000 Retained earnings 15,425 14,714 Treasury stock (1,480) (1,394) Net unrealized loss on securities available-for-sale (589) (386) ------- ------- TOTAL SHAREHOLDERS' EQUITY $18,856 $18,434 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $18,977 $18,557 ------- ------- ------- -------
NOTE 15. UPBANCORP, INC. - PARENT ONLY FINANCIAL STATEMENTS (Continued)
STATEMENTS OF INCOME
Years ended December 31, (DOLLARS IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------- INCOME Dividends received from bank subsidiaries $ 1,411 $ 125 $ 600 Interest on short term investments 9 8 23 -------- -------- -------- Total Income 1,420 133 623 -------- -------- -------- EXPENSE Salaries and employee benefits 333 343 339 Other expense 122 35 90 -------- -------- -------- Total Expense 455 378 429 -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES AND UNDISTRIBUTED INCOME (LOSS) OF SUBSIDIARIES 965 (245) 194 Income tax benefit 112 94 81 -------- -------- -------- INCOME (LOSS) BEFORE UNDISTRIBUTED INCOME (LOSS) OF SUBSIDIARIES 1,077 (151) 275 Undistributed income of subsidiaries 77 1,169 531 -------- -------- -------- NET INCOME $ 1,154 $ 1,018 $ 806 -------- -------- -------- -------- -------- --------
REPORT OF MANAGEMENT ON RESPONSIBILITY FOR FINANCIAL REPORTING UPBANCORP, INC. AND SUBSIDIARIES
To the Shareholders of Upbancorp, Inc.:
The accompanying consolidated financial statements were prepared by Management, who is responsible for the integrity and objectivity of the data presented. In the opinion of Management, the financial statements, which necessarily include amounts based on Management's best estimates and judgments, have been prepared in conformity with generally accepted accounting principles appropriate to the circumstances.
Management depends upon the Company's system of internal controls in meeting its responsibilities for reliable financial statements. This system is designed to provide reasonable assurance that assets are safeguarded and that transactions are properly recorded and executed in accordance with Management's authorization. Judgments are required to assess and balance the relative cost and the expected benefits of these controls. As an integral part of the system of internal controls, the Bank Subsidiaries contract with a professional staff of Independent Internal Auditors who conduct operational, financial, and special audits, and coordinate audit coverage with the Independent Auditors.
The consolidated financial statements have been audited by our Independent Auditors, McGladrey & Pullen LLP, who render an independent professional opinion on Management's financial statements.
The Audit Committee of Upbancorp, Inc.'s Board of Directors, composed solely of outside directors, meets regularly with the Independent Internal Auditors, the Independent Auditors and Management to assess the scope of the annual examination plan and to discuss audit, internal control and financial reporting issues, including major changes in accounting policies and reporting practices. The Independent Internal Auditors and the Independent Auditors have free access to the Audit Committee, without Management present, to discuss the results of their audit work and their evaluations of the adequacy of internal controls and the quality of financial reporting.
Sincerely,
/s/Richard K. Ostrom - ------------------------------------- Richard K. Ostrom President and Chief Executive Officer
/s/Kathleen L. Harris - ------------------------------------- Kathleen L. Harris Vice President & Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Upbancorp, Inc.:
We have audited the accompanying consolidated statements of condition of Upbancorp, Inc. and subsidiaries as of December 31, 1996 and the related consolidated statements of income, cash flows and changes in shareholders' equity 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.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Upbancorp, Inc. and subsidiaries as of December 31, 1996 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles.
/s/McGladrey & Pullen LLP ------------------------- McGladrey & Pullen LLP
Schaumburg, Illinois February 21, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Upbancorp, Inc.:
We have audited the accompanying consolidated statements of condition of Upbancorp, Inc. and subsidiaries as of December 31, 1995 and the related consolidated statements of income, cash flows and changes in shareholders' equity for each of the two years in the period ended December 31, 1995. 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 financial position of Upbancorp, Inc. and subsidiaries as of December 31, 1995 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP ----------------------- Arthur Andersen LLP
Chicago, Illinois February 23, 1996
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
The Company's Board of Directors approved the selection of McGladrey & Pullen, LLP as new independent accountants upon the recommendation of the Company's Audit Committee. This change was effective August 5, 1996. Further information concerning this change can be found in the Proxy Statement for the 1997 Annual Meeting of Shareholders of the Company to be held April 15, 1997, which is incorporated herein by reference.
PART III
ITEM 10:
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors and Executive Officers of the Company, their family relationships and their business experience is contained in the "Information about Directors and Nominees" and "Executive Officers" sections of the Proxy Statement for the 1997 Annual Meeting of Shareholders of the Company to be held on April 15, 1997, which is incorporated herein by reference.
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION
Information regarding compensation of the Executive Officers of the Company is contained in the "Executive Compensation" section of the Proxy Statement for the 1997 Annual Meeting of Shareholders of the Company to be held on April 15, 1997, which is incorporated herein by reference.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and management is contained in the "Security Ownership of Certain Beneficial Owners and Management" section of the Proxy Statement for the 1997 Annual Meeting of Shareholders of the Company to be held on April 15, 1997, which is incorporated herein by reference.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions of the Company is contained in the "Certain Relationships and Related Transactions" section of the Proxy Statement for the 1997 Annual Meeting of Shareholders of the Company to be held on April 15, 1997, which is incorporated herein by reference. Further information with respect to loans to the Directors and Executive Officers of the Company is provided in Note 10 to the Consolidated Financial Statements located elsewhere in this Form 10-K.
PART IV
ITEM 14:
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following exhibits, financial statements and financial statement schedules are filed as part of this report:
FINANCIAL STATEMENTS
Consolidated Statements of Condition - December 31, 1996 and 1995
Consolidated Statements of Income - Years ended December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Shareholders' Equity - Years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
FINANCIAL STATEMENT SCHEDULES
All schedules normally required by Form 10-K are omitted since they are either not applicable or the required information is shown in the financial statements or notes thereto.
EXHIBITS
(3) By-laws as amended by the Company's Board of Directors on December 15, 1995.
(b) REPORTS ON FORM 8-K - No reports on Form 8-K were filed during the fourth quarter of 1996.
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.
Date: February 21, 1997 UPBANCORP, INC. --------------- (The Registrant)
/s/ Richard K. Ostrom --------------------- Richard K. Ostrom President and Chief Executive Officer
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 THEIR CAPACITIES ON FEBRUARY 21, 1997.
/s/ Roger P. Eklund Chairman of the Board February 21, 1997 - -------------------------------- Roger P. Eklund
/s/ Stephen W. Edwards, CLU Director February 21, 1997 - -------------------------------- Stephen W. Edwards, CLU
/s/ Delbert R. Ellis Director February 21, 1997 - -------------------------------- Delbert R. Ellis
/s/ John E. Fahrendorf, Jr. Director February 21, 1997 - -------------------------------- John E. Fahrendorf, Jr.
/s/ Alfred E. Hackbarth, Jr. Director February 21, 1997 - -------------------------------- Alfred E. Hackbarth, Jr.
/s/ James E. Heraty Director February 21, 1997 - -------------------------------- James E. Heraty
/s/ Marvin L. Kocian Director February 21, 1997 - -------------------------------- Marvin L. Kocian
/s/ Richard K. Ostrom Director February 21, 1997 - -------------------------------- Richard K. Ostrom
/s/ B. Arthur Russell Director February 21, 1997 - -------------------------------- B. Arthur Russell