-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Oz0MVTmQ8Wn5jpPRgYqQyioUD2aSDj/FZOKWAS754QS+JuRZco+F3VAIEE/jV6Xi u+BBMrnGloaKFEeaw1POXw== 0000912057-01-505894.txt : 20010402 0000912057-01-505894.hdr.sgml : 20010402 ACCESSION NUMBER: 0000912057-01-505894 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UPBANCORP INC CENTRAL INDEX KEY: 0000715081 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 363207297 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-12292 FILM NUMBER: 1588085 BUSINESS ADDRESS: STREET 1: 4753 N BROADWAY CITY: CHICAGO STATE: IL ZIP: 60640 BUSINESS PHONE: 3128782000 MAIL ADDRESS: STREET 1: 4753 N BROADWAY CITY: CHICAGO STATE: IL ZIP: 60640 10-K405 1 a2042354z10-k405.txt 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 2000. Commission file number 0-12292 UPBANCORP, INC. --------------- (Exact name of registrant as specified in its charter) DELAWARE 36-3207297 ---------- ------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4753 N. BROADWAY, CHICAGO, ILLINOIS 60640 - ----------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (773) 878-2000 -------------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK-$1 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 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 for the past 90 days. Yes /X/ No / / Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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 9, 2001 (based upon the closing price as of such date), was approximately $20,336,085. The number of shares outstanding of the registrant's common stock, $1.00 par value, as of March 9, 2001 was 835,055. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the annual shareholders meeting to be held April 17, 2001, are incorporated by reference into Part III of this Form 10-K. UPBANCORP, INC. - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE PART I Item 1: Business............................................................................... 3 Item 2: Properties............................................................................. 6 Item 3: Legal Proceedings...................................................................... 7 Item 4: Submission of Matters to a Vote of Security Holders.................................... 7 PART II Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters.............. 7 Item 6: Selected Financial Data................................................................ 8 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations.. 9 Item 7A: Quantitative and Qualitative Disclosures on Market Risk................................ 20 Item 8: Financial Statements and Supplementary Data............................................ 21 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.. 42 PART III Item 10: Directors and Executive Officers of the Registrant..................................... 42 Item 11: Executive Compensation................................................................. 42 Item 12: Security Ownership of Certain Beneficial Owners and Management......................... 42 Item 13: Certain Relationships and Related Transactions......................................... 42 PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 43
2 PART I ITEM 1: BUSINESS UPBANCORP, INC. Upbancorp, Inc. ("Upbancorp" or the "Company"), is a bank holding company organized in 1983 under the laws of the State of Delaware. Upbancorp owns all of the outstanding common stock of Uptown National Bank of Chicago ("Subsidiary Bank" or "Uptown"), organized in 1929 and located in Chicago, Illinois. There are branches of Uptown located in the metropolitan Phoenix area and operate under the name of Heritage Bank ("Heritage"). Heritage was organized in 1977. Upbancorp does not engage in any activities other than providing administrative services and acting as a holding company for Uptown. The Company is a publicly traded banking company with total assets of $397 million at year-end 2000 and its headquarters are in Chicago, Illinois. The majority of the operational responsibilities of the Subsidiary Bank rests with its Officers and Directors. The Company and its Subsidiary Bank employed approximately 159 full-time equivalent employees at December 31, 2000. Based on the Company's approach to decision making, it has decided that its business is comprised of a single segment. SUBSIDIARY BANK Uptown is a full-service community bank, which operates eight banking offices and one loan production office in the Chicagoland area and metropolitan Phoenix area. Approximately 77% of its deposits are related to Uptown, with the remainder related to Heritage. The Subsidiary Bank is engaged in the general commercial banking business in addition to offering a complete range of retail banking services. Uptown conducts 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 in the Chicagoland area with the exception of four facilities, which are leased. In February 2000, Uptown applied to the Office of the Comptroller of the Currency ("OCC") to merge Heritage with and into and under the charter of Uptown. This merger was approved and later consummated on September 1, 2000. Following the merger, the offices of Heritage have operated as branches of Uptown. Heritage will continue to retain its name in the Phoenix area. The merger was a result of the Company's effort to further enhance operational efficiencies and improve profitability. The majority of operational efforts have been combined with the resulting effectiveness already being recognized. All current locations have remained fully operational. There have been no adverse changes to our products and services offered. SUPERVISION AND REGULATION The Company and its Subsidiary Bank are subject to regulation and supervision by various governmental regulatory authorities including, but not limited to, the Board of Governors of the Federal Reserve System (the "FRB"), the Office of the Comptroller of the Currency (the "OCC"), the Federal Deposit Insurance Corporation (the "FDIC"), 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 Bank, 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 3 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 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. The deposits of the Subsidiary Bank 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 1934, as amended. Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under such act. 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 Bank. 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 Bank attempts to minimize earnings volatility related to fluctuations in interest rates through the use of formal asset/liability management programs which identify imbalances between the repricing of earning assets and funding sources, among other things. In addition to the policy of 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 internet banking, PC banking, 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 Bank is exposed to varying types and levels of competition. In general, the Subsidiary Bank competes, anticipates and responds within each individual market area. Both Uptown and Heritage 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 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. 4 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 Bank exceeded the minimum required capital guidelines for both risk-based capital ratios and the leverage ratio at December 31, 2000. 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 Bank to pay dividends. This limits 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 Note 12 "Restrictions on Retained Earnings" in the Notes to Consolidated Financial Statements included under Item 8 of 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 it can pay to its 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. 5 ITEM 2: PROPERTIES The following table summarizes the Company and Subsidiary Bank's properties by location:
AFFILIATE PROPERTY TYPE/LOCATION OWNERSHIP SQUARE FOOTAGE - --------- ---------------------- --------- -------------- THE COMPANY 4753 N. Broadway - - Chicago, Illinois UPTOWN Main Office (Illinois): 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 Banking Office: 1058 W. Bryn Mawr Avenue Leased 1,500 Chicago, Illinois Aircraft Lending Office: 43 W 518 Route 30 Leased 1,800 Aurora Municipal Airport Sugar Grove, Illinois Banking Office: 4553-57 N. Lincoln Avenue Leased 1,870 Chicago, Illinois Main Office (Arizona): 4222 E. Camelback Road Leased 4,100 Suite J200 Phoenix, Arizona Banking Office: 4222 E. Camelback Road Leased 4,100 Suite J100 Phoenix, Arizona Banking Office: 1333 W. Broadway Owned 10,500 Tempe, Arizona
In addition to the banking locations listed above, the Subsidiary Bank owns 13 automatic teller machines, strategically located within the Subsidiary's market places. At December 31, 2000, the properties and equipment of the Company had an aggregate net book value of approximately $5.5 million. Note 1: These locations are owned by Uptown's wholly-owned subsidiary, BCBC. Uptown utilizes approximately 49,000 square feet for its main office and the rest of the facility is leased out by BCBC to independent third parties. 6 ITEM 3: LEGAL PROCEEDINGS Neither the Company nor its Subsidiary Bank 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 Bank. 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 2000. P A R T II 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, 2000, there were 290 shareholders of record. The following table sets forth common stock information during each quarter of 2000 and 1999.
2000 1999 ------------------------------------------------------------------------- MARKET PRICE OF Fourth Third Second First Fourth Third Second First ------------------------------------------------------------------------- COMMON STOCK: High $32.25 $26.50 $26.00 $33.00 $33.25 $37.50 $37.50 $35.00 Low 26.50 24.88 24.75 25.25 33.00 32.50 32.50 33.00 Quarter-End 29.75 26.50 24.88 26.00 33.00 33.00 32.50 35.00 CASH DIVIDENDS PER SHARE 0.130 0.130 0.130 0.130 0.130 0.130 0.130 0.130
A discussion regarding the regulatory restrictions applicable to the Subsidiary Bank's ability to pay dividends is included in the Dividends Section under Item 1 of this Form 10-K and Note 12 in the Notes to Consolidated Financial Statements found under Item 8 of this Form 10-K. 7 ITEM 6: SELECTED FINANCIAL DATA The following Selected Financial Data is not covered 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 of this Form 10-K. Consolidated financial information reflecting a summary of the operating results and financial condition of the Company for the five years ended December 31, 2000, is presented in the following table.
SELECTED FINANCIAL DATA YEARS ENDED DECEMBER 31, -------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 1998 1997 1996 -------------------------------------------------------- OPERATING RESULTS: Interest income $30,090 $23,530 $20,040 $17,722 $15,805 Interest expense 13,105 8,547 7,109 6,115 5,425 ------ ------ ------ ------ ------ Net interest income 16,985 14,983 12,931 11,607 10,380 Provision for loan losses 695 885 580 410 914 Other income 2,285 3,213 3,154 2,667 2,440 Other expense 13,943 13,349 11,940 10,760 10,059 ------ ------ ------ ------ ------ Income before income taxes 4,632 3,962 3,565 3,104 1,847 Income taxes 1,611 1,385 1,265 1,127 693 ------ ------ ------ ------ ------ Net income $3,021 $2,577 $2,300 $1,977 $1,154 ====== ====== ====== ====== ====== PER SHARE DATA: Net income $3.61 $3.00 $2.63 $2.24 $1.30 Cash dividends declared 0.52 0.52 0.50 0.50 0.50 Dividend payout ratio 14.40% 17.33% 19.01% 22.32% 38.39% Book value 31.01 26.90 26.02 23.79 21.36 Market price 29.75 33.00 35.25 31.13 17.06 Weighted average shares 836,478 859,710 875,907 882,800 885,741 BALANCE SHEET HIGHLIGHTS: Assets $396,671 $324,777 $269,462 $231,377 $226,395 Loans, net of unearned discount 292,305 249,719 195,095 166,252 131,069 Deposits 348,548 270,155 226,034 198,132 195,302 Shareholders' equity 25,897 22,524 22,638 21,000 18,856 Average equity to average asset ratio 6.54% 7.77% 8.69% 8.73% 8.58% Asset growth rate 22.14% 20.53% 16.46% 2.20% 9.72% PERFORMANCE RATIOS: Return on average assets 0.84% 0.87% 0.91% 0.87% 0.54% Return on average shareholders' equity 12.77% 11.22% 10.44% 9.98% 6.28% Net interest margin (1) 4.16% 4.73% 4.74% 4.84% 4.62% Percentage nonperforming loans/ total loans 0.59% 0.36% 0.67% 0.69% 1.61% Percentage nonperforming assets/ total assets 0.43% 0.28% 0.49% 0.64% 1.14%
(1) Interest income and yields on non-taxable securities are reflected on a tax equivalent basis based upon a statutory Federal income tax rate of 34%. 8 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 of this Form 10-K as well as the Selected Financial Data presented in Item 6 of this Form 10-K. This discussion and analysis is intended to address significant factors affecting the Company's consolidated statements of condition and statements of income for the past three years. The discussion is designed to provide shareholders with a comprehensive review of the operating results and financial condition of the Company. SUMMARY The Company's consolidated net income for 2000 totaled $3,021 or $3.61 per share. This is compared to net income and earnings per share of $2,577 or $3.00 and $2,300 or $2.63 for 1999 and 1998, respectively. The results of 2000 represent a 17% improvement in net income from 1999 after a 12% improvement in 1999 over 1998. As we noted last year and, again, consistent in the current year, the earnings improvement is mostly attributable to increased net interest income. The operating performance of bank holding companies is often measured and comparisons made based on net income to average assets and net income to average equity. The Company's return on average shareholders' equity for 2000 was 12.77% as compared to 11.22% in 1999 and 10.44% in 1998. Return on average assets for 2000 was .84% as compared to .87% in 1999 and .91% in 1998. The slight decrease in the Company's return on average assets from the prior years is a result of the Subsidiary Bank's continuing rapid growth in total assets. Nonperforming loans increased as a percentage of outstanding loans during the past year. Nonperforming loans totaled $1,721 or .60% of net loans at December 31, 2000, as compared to $907 or .36% in 1999 and $1,309 or .67% in 1998. The majority of this increase relates to one loan which was restructured during the year through a reduction in the interest rate. The loan is paying as agreed under the new agreement. Upbancorp continues to maintain a strong capital base at December 31, 2000. Consolidated capital levels as well as the Subsidiary Bank's capital ratio exceed minimum capital requirements. NET INTEREST INCOME Net interest income, which is the difference between interest and fees earned on assets and the interest paid on deposits and other funding sources, is the primary source of earnings for the Company. This component represents 88% of the Company's net revenues in 2000. A detailed analysis highlighting the changes in net interest income is provided in Table 2. Interest earned on tax-exempt loans and investments is adjusted for comparative purposes to a taxable equivalent basis using the federal tax rate of 34%, resulting in a fully taxable equivalent ("FTE") net interest income. Net interest income on a fully taxable equivalent basis totaled $17,248 in 2000 compared to $15,238 in 1999 and $13,115 in 1998. The significant increase in net interest income in 2000 includes an increase of $3,134 due to volume increases in 2000 following a $2,503 increase due to volume in 1999. As anticipated in a rising rate environment such as that experienced in the year 2000, the negative impact of rate fluctuation was slightly higher than that of the prior year. Rate movements negatively impacted the overall improvement in net interest income by $912 after negatively impacting net interest income by $315 in 1999. The 2000 volume increase was fueled by the earning assets added to the balance sheet. Average interest earning assets increased by $64,545 or 23.43%. The majority of that increase is the result of growth in average loan balances due in large part to the continuing strong economic conditions, including the real estate markets in both the Chicago and Phoenix metropolitan areas. In addition, we recognize continued success of Zook Pilot Services, the aircraft lending division. The loan growth was funded via a more aggressive pricing strategy with regard to time deposits and a greater utilization of borrowed funds as well as maturities and selective sales in our investment portfolio. This factor, in addition to the rising rate environment described above, contributed to the larger negative impact to net interest income as a result of rate. 9 Net interest margin represents net interest income as a percentage of total interest earning assets. The Company attempts to favorably impact net interest income through investment decisions on interest earning assets and monitoring interest rates its banking subsidiary offers, particularly rates for time deposits and short-term borrowings. The Company's net interest spread measured on a fully taxable equivalent basis decreased to 5.0% in 2000 from 5.53% in 1999 and 5.58% in 1998. This is again a result of the type of rate environment experienced in 2000, as well as the higher cost paid on the deposits and borrowed funds to allow for our continued loan growth. Table 1 summarizes Upbancorp's average earning assets and funding sources over the last three years. Additionally, the table shows interest income and expense related to each category of assets and funding sources and the yields earned and the rates paid on such assets and funding sources.
TABLE 1 NET INTEREST INCOME AND MARGIN ANALYSIS 2000 1999 1998 -------------------------------------------------------------------------------------- Average Yield/ Average Yield/ Average Yield/ ASSETS: Balance Interest Rate Balance Interest Rate Balance Interest Rate -------------------------------------------------------------------------------------- Investment securities: Taxable $45,296 $2,883 6.36% $38,104 $2,309 6.06% $42,108 $2,540 6.03% Nontaxable (1)(2) 7,647 651 8.51% 6,987 609 8.72% 4,015 399 9.94% Federal funds sold 9,585 621 6.48% 4,174 209 5.01% 8,355 437 5.23% Mortgages held-for-sale - - - 1,534 86 5.61% 2,314 118 5.10% Loans, net of unearned discount (2)(3) 277,482 26,198 9.44% 224,666 20,572 9.16% 178,076 16,730 9.39% -------- ------- ---- -------- ------- ---- -------- ------ ---- Total interest earning assets $340,010 $30,353 8.93% $275,465 $23,785 8.63% $234,868 $20,224 8.61% -------- ------- ---- -------- ------- ---- -------- ------- ---- Cash and due from banks 13,629 11,073 10,073 Reserve for loan losses (3,426) (2,759) (2,247) Other assets 11,451 11,705 10,865 -------- -------- -------- Total assets $361,664 $295,484 $253,559 ======== ======== ======== LIABILITIES & SHAREHOLDERS' EQUITY: Savings, NOW and money market deposits $128,336 $4,343 3.38% $109,264 $3,020 2.76% $100,853 $2,670 2.65% Other time deposits 118,644 7,058 5.95% 88,203 4,438 5.03% 67,727 3,630 5.36% Borrowed funds and note payable 27,715 1,704 6.15% 21,411 1,089 5.09% 14,955 809 5.41% -------- ------- ---- -------- ------ ---- -------- ------ ---- Total interest bearing liabilities $274,695 $13,105 4.77% $218,878 $8,547 3.90% $183,535 $7,109 3.87% -------- ------- ---- -------- ------ ---- -------- ------ ---- Demand deposits 58,823 49,638 45,306 Other liabilities 4,482 3,994 2,685 Shareholders' equity 23,664 22,974 22,033 -------- -------- -------- Total liabilities and shareholders' equity $361,664 $295,484 $253,559 ======== ======== ======== Net interest income/margin $17,248 4.16% $15,238 4.73% $13,115 4.74% ======= ==== ======= ==== ======= ==== Net interest income/earning assets 5.07% 5.53% 5.58% ==== ==== ====
(1) Interest income and yields on non-taxable securities are reflected on a tax equivalent basis based upon a statutory Federal income tax rate of 34% for 2000, 1999 and 1998. (2) Loans and securities on a non-accrual basis for the recognition of interest income are included in loans, net of unearned discount, and investment securities for purposes of this analysis. 10 (3) Loan fees included in the above interest income computations total $1,459, $1,133 and $907 for the years ended December 31, 2000, 1999 and 1998, respectively. At December 31, 2000, 1999 and 1998, deferred loan and commitment fee income, net of direct loan origination costs, totaled $498, $438 and $235, respectively. Table 2 analyzes the changes in interest income, interest expense and net interest income that result from changes in volumes of earning assets and funding sources, as well as fluctuations in interest rates. Changes noted in the volume/rate column represent variances attributable jointly to changes in volume and rate. TABLE 2 CHANGES IN NET INTEREST INCOME APPLICABLE TO VOLUMES AND INTEREST RATES
2000 COMPARED TO 1999 Interest Income/Expense Increase/(Decrease) due to: - --------------------- ----------------------- --------------------------- Increase Volume/ 2000 1999 (Decrease) Volume Rate Rate ------ ------ ---------- ------- ----- ----- Investment securities: Taxable $2,883 $2,309 $574 $436 $116 $22 Non-taxable (1) 651 609 42 57 (14) (1) Federal funds sold 621 209 412 271 61 80 Mortgages held-for-sale - 86 (86) (86) - - Loans 26,198 20,572 5,626 4,836 639 151 ------- ------- ------ ------ ---- ---- Total interest income (1) $30,353 $23,785 $6,568 $5,514 $802 $252 -- ------- ------- ------ ------ ---- ---- Savings, NOW and money market deposits 4,343 3,020 1,323 527 678 118 Other time deposits 7,058 4,438 2,620 1,532 809 279 Borrowed funds 1,704 1,089 615 321 227 67 ------- ------- ------ ------ ----- ---- Total interest expense 13,105 8,547 4,558 2,380 1,714 464 ------- ------- ------ ------ ----- ---- Net interest income $17,248 $15,238 $2,010 $3,134 $(912) $(212) ======= ======= ====== ====== ===== ===== 1999 COMPARED TO 1998 Interest Income/Expense Increase/(Decrease) due to: - --------------------- ----------------------- --------------------------- Increase Volume/ 1999 1998 (Decrease) Volume Rate Rate ---- ---- ---------- ------ ---- ---- Investment securities: Taxable $2,309 $2,540 $(231) $(242) $12 $(1) Non-taxable (1) 609 399 210 295 (49) (36) Federal funds sold 209 437 (228) (218) (19) 9 Mortgages held-for-sale 86 118 (32) (40) 12 (4) Loans 20,572 16,730 3,842 4,377 (424) (111) ------- ------- ------ ------ ----- ----- Total interest income (1) $23,785 $20,224 $3,561 $4,172 $(468) $(143) ------- ------- ------ ------ ----- ----- Savings, NOW and money market deposits 3,020 2,670 350 223 117 10 Other time deposits 4,438 3,630 808 1,097 (222) (67) Borrowed funds and note payable 1,089 809 280 349 (48) (21) ------- ------- ------ ------ ----- ---- Total interest expense 8,547 7,109 1,438 1,669 (153) (78) ------- ------- ------ ------ ----- ---- Net interest income $15,238 $13,115 $2,123 $2,503 $(315) $(65) ======= ======= ====== ====== ===== ====
(1) Interest income and yields on non-taxable securities are reflected on a tax equivalent basis based upon a statutory Federal income tax rate of 34% for 2000, 1999 and 1998. FUNDS MANAGEMENT ANALYSIS AND INTEREST RATE SENSITIVITY The earning asset portfolio of community banks is typically the leading determinate of performance for the Company. This is because the largest percentage of total income for the Company is attributable to net interest income. The policies and practices for managing liquidity risk and interest rate risk are set by the Subsidiary Bank's Funds Management Committee ("FMC") whose 11 goal is to ensure maximum returns within safe and sound risk parameters. The FMC monitors exposure in view of market developments and the Subsidiary Bank's financial condition, sets guidance for interest rate risk management decisions, ensures consistency in the measurement of risk and monitors liquidity and capital adequacy. In this capacity, the FMC places limits on the level of investments in various assets and off-balance sheet instruments, as well as on the funding levels for loans and deposits. In addition, the FMC establishes pricing policies for the Subsidiary Bank's products and services. Interest rate risk is the degree to which market interest rate fluctuations can affect net interest income. The Company not only responds to this interest rate risk, but also tries to anticipate and build strategies based on the current interest rate and maturity characteristics of the various balance sheet categories of assets and liabilities. This is done through a formalized funds management process and while there are several ways in which to analyze interest rate risk, the traditional method is called a "gap" analysis. A gap analysis is a static management tool used to identify mismatches or gaps in the repricing of assets and liabilities within specified periods of time. The Company's gap analysis as of December 31, 2000, is presented in Table 3. Earning assets and interest bearing liabilities are presented within selected time intervals based upon their repricing and maturity characteristics. In a perfectly matched gap analysis, an equal amount of rate sensitive assets and liabilities would be reflected as repricing within each given time interval. A positive interest rate sensitivity gap indicates more assets than liabilities will reprice in that time period, while a negative gap indicates more liabilities will reprice. Generally, a positive gap position, or asset sensitive position, has a favorable impact on net interest income in periods of rising interest rates. Conversely, a negative gap would generally imply a favorable impact on net interest income in periods of declining interest rates. TABLE 3 REMAINING MATURITY OR EARLIEST POSSIBLE PRICING
Up to Greater 3 3-12 1-3 3-5 than Months Months Years Years 5 Years Total ------- ------- ------ ------ ------- ------ RATE SENSITIVE ASSETS: Federal funds sold $12,600 $ - $ - $ - $ - $12,600 Investment securities - Debt (1) 16,565 8,478 3,026 28,232 5,819 62,120 Investment securities - Equity(1) - - - - 5,306 5,306 Loans (1) 82,965 19,791 53,284 116,068 19,396 291,504 ------- ------- ------ ------- ------ ------- Total Rate Sensitive Assets 112,130 28,269 56,310 144,300 30,521 371,530 ------- ------- ------ ------- ------ ------- RATE SENSITIVE LIABILITIES: Savings, NOW, and money market deposits 37,062 37,215 47,730 11,338 - 133,345 Other time deposits 28,674 101,294 18,092 1,243 - 149,303 Borrowed funds & note payable 12,849 5,000 - - - 17,849 ------- ------- ------ ------ ------ ------- Total Rate Sensitive Liabilities 78,585 143,509 65,822 12,581 - 300,497 ------- ------- ------ ------ ------ ------- INTEREST SENSITIVITY GAP: Incremental $33,545 ($115,240) ($9,512) $131,719 $30,521 $71,033 ======= ========= ======== ======== ======= ======= Cumulative $33,545 ($81,695) ($91,207) $40,512 $71,033 CUMULATIVE INTEREST SENSITIVE GAP AS A PERCENTAGE OF TOTAL EARNING ASSETS 9% -22% -25% 11% 19%
- -------------------- (1) Loans and securities on a non-accrual basis are not included as a part of this analysis. Table 3 shows the under-one-year net liability position at December 31, 2000, was $(81,695) (20.60% of total assets), compared to the under-one-year net liability position of $(79,609) at December 31, 1999 (24.51% of total assets). A significant under-one-year net liability position would indicate that the Company's net interest income is exposed to rising short-term interest rates, while a significant net asset position would mean an exposure to declining short-term interest rates. Upbancorp and Uptown follow a policy of 12 maintaining a relatively balanced mix of rate-sensitive assets and liabilities, making each side of the balance sheet equally flexible in reacting to changes in market interest rates so that net interest income will not be materially affected in periods of rising or falling interest rates. The following table shows the Company's available-for-sale investment securities' maturity distribution and corresponding tax-equivalent yields at December 31, 2000: TABLE 4 SECURITIES AVAILABLE-FOR-SALE MATURITY DISTRIBUTION AND PORTFOLIO YIELDS
One year One year Five years After or less to five years to ten years ten years ----------------- ---------------- ---------------- ---------------- Amortized Yield Amortized Yield Amortized Yield Amortized Yield Cost (%) Cost (%) Cost (%) Cost (%) ---- --- ---- --- ---- --- ---- --- U.S. Treasury securities $10,722 6.34% $ - 0.00% $ - 0.00% - 0.00% U.S. Agency securities 8,606 6.86% 30,300 6.96% - 0.00% - 0.00% States and political subdivisions 196 10.83% 753 6.95% 2,103 7.38% 3,740 7.72% ------- ------ ------- ---- ------ ---- ------ ---- Total $19,524 6.61% $31,053 6.96% $2,103 7.38% $3,740 7.72% ======= ======= ====== ====== Amortized Yield Cost (%) ---- --- Collateralized mortgage obligations and other mortgage-backed securities $5,701 6.57% ====== Equity securities $5,410 6.52% ======
LOAN PORTFOLIO The following table shows the major classifications of loans at December 31: TABLE 5 LOAN PORTFOLIO
2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- Commercial - Aircraft related $54,614 $53,531 $26,617 $17,846 $9,154 Commercial - Other 58,404 42,320 33,395 30,361 30,344 Secured by real estate - Construction 52,637 35,686 22,365 9,440 9,829 Secured by real estate - Farmland - - - - 62 Secured by real estate - Residential (1 to 4 family) 32,431 30,147 30,971 34,899 34,071 Secured by real estate - Residential (5 or more) 30,264 27,514 29,900 27,635 19,736 Secured by real estate - Non-residential 58,467 55,352 45,640 40,984 23,925 Consumer and all other 5,986 5,607 6,442 5,331 4,224 Deferred loan income (498) (438) (235) (244) (276) -------- -------- -------- -------- -------- Total loans 292,305 249,719 195,095 166,252 131,069 Less: Allowance for loan losses (3,817) (3,114) (2,499) (2,010) (1,485) -------- -------- -------- -------- -------- Total loans, net of allowance for loan losses $288,488 $246,605 $192,596 $164,242 $129,584 ======== ======== ======== ======== ========
13 The commercial loan maturities and sensitivity to changes in interest rates at December 31, 2000, are shown in the following table: TABLE 6 COMMERCIAL LOAN MATURITIES AND SENSITIVITIES TO CHANGES IN INTEREST RATES
After one In one year through Over or less five years five years Total ------- ---------- ---------- ----- AT DECEMBER 31, 2000 Maturities: Commercial loans $48,702 $62,987 $1,329 $113,018 Secured by real estate - Construction 25,754 26,856 27 52,637 Secured by real estate - Non-residential 19,360 29,348 9,759 58,467 ------- -------- ------- -------- Total $93,816 $119,191 $11,115 $224,122 ======= ======== ======= ======== Interest rate sensitivity: Fixed rate $33,382 $116,506 $7,381 $157,269 Variable rate 60,434 2,685 3,734 66,853 ------- -------- ------- -------- Total $93,816 $119,191 $11,115 $224,122 ======= ======== ======= ========
LIQUIDITY MANAGEMENT A key element of the Company's FMC process is the management of liquidity. Liquid funds are needed by the Subsidiary Bank to meet the needs of its depositors, borrowers and for regulatory requirements. Liquid funds, however, generally have very low earnings potential and thus careful control of the Subsidiary Bank's liquidity position is needed. Monitoring of this liquidity position is done daily to ensure constant adequacy and to maintain optimal levels of liquidity on the balance sheet. Another source of liquidity is off balance sheet, in the form of pre-approved loan commitments from the Federal Home Loan Bank and various correspondent banks. For a further review of the Company's sources and uses of funds, see the Consolidated Statements of Cash Flows found in Item 8 of this Form 10-K. The Company's cash flows are composed of three classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Net cash provided by operating activities, consisting primarily of earnings, was $6,106 for the year ended December 31, 2000, and $7,398 for the year ended December 31, 1999. A significant component in the fluctuation of net cash provided by or used in operating activities is the timing of the sale of loans held-for-sale to permanent investors. Net cash used in investing activities, consisting primarily of loan and investment funding was $68,427 and $58,167 for the years ended December 31, 2000 and 1999, respectively. Net cash provided by financing activities, consisting of deposit growth and increased borrowed funds and note payable, was $67,114 and $53,130 for the years ended December 31, 2000 and 1999, respectively. The Company requires adequate liquidity to pay its expenses and pay shareholder dividends. Liquidity is provided to the Company from the Subsidiary Bank in the form of dividends. Other liquidity is provided by cash balances in banks, maturing investments and interest on investments. For a discussion of dividend payments, please see Note 12 in the Notes to Consolidated Financial Statements found in Item 8 of this Form 10-K. One method of analyzing the Company's liquidity position is through a careful review of available funding sources. The following table provides information as it pertains to funding sources and reflects a year-to-year comparison of the sources of the Company's liability funding based upon year-end balances. TABLE 7 FUNDING SOURCES - YEAR-END BALANCES
2000 1999 1998 ---- ---- ---- Demand deposits $65,900 $53,213 $47,062 Savings, NOW & money market deposits 133,345 119,309 104,067 Other time deposits of $100 or less 98,199 60,661 55,021 -------- -------- -------- Core deposits 297,444 233,183 206,150 Other time deposits of $100 or more 51,104 36,972 19,884 Borrowed funds and note payable 17,849 28,634 18,097 -------- -------- -------- Total funding sources $366,397 $298,789 $244,131 ======== ======== ========
14 Total funding sources increased 22.63% at December 31, 2000, from prior year levels. Core deposits increased 27.56% from December 31, 1999 balances while other time deposits $100 or more grew at a 38.22% rate. A recap of other time deposits $100 and over is presented in the following table. For a review of total other time deposit maturities, see Note 6 in the Notes to Consolidated Financial Statements found in Item 8 of this Form 10-K. A recap of borrowed funds and notes payable can be found in Note 7 in the Notes to Consolidated Financial Statements found in Item 8 of this Form 10-K. TABLE 8 REMAINING MATURITY OF OTHER TIME DEPOSITS - $100,000 AND OVER
Three months or less $7,201 Over 3 through 6 months 13,598 Over 6 through 12 months 23,064 Over 12 months 7,241 ------- $51,104 =======
Borrowing facilities are available to the Subsidiary Bank through various correspondent banks in the amount of $25,742. These lines are established for the purpose of borrowing on an overnight basis in the form of Federal Funds. In addition, Uptown has borrowing capacity with the Federal Home Loan Bank of Chicago in the amount of $29,974 for short and long-term borrowings. These borrowings are to be secured by qualifying 1-4 family first mortgages, private mortgage backed securities or U.S. Treasury and Agency Obligations. The Company has a $5 million line of credit, a secured revolving note payable, with a correspondent bank at December 31, 2000. This note had an outstanding balance of $3 million. Interest is calculated on the basis of 3-month LIBOR plus 150 basis points with interest due and payable quarterly. The expiration date of the line is April 1, 2002. The note also contains certain covenants which limit changes in capital structure, the purchase of or merger with other banks and/or businesses, and the guarantees of other liabilities and obligations. In addition, the Company must meet certain financial ratios. The Company was in compliance with all covenants of the agreement at December 31, 2000. CAPITAL RESOURCES A strong capital structure is vital for many reasons, one of which is to allow the Company the opportunity for future growth. Upbancorp has developed a policy to manage its capital structure and that of its Subsidiary Bank in accordance with regulatory guidelines and to ensure appropriate use of this resource. The Company's capital policy requires that the Company and its Subsidiary Bank maintain a capital ratio in excess of the minimum regulatory guidelines. At December 31, 2000, both entities exceeded regulatory established minimums as defined for financial institutions. Please see Note 12 in the Notes to Consolidated Financial Statements included under Item 8 of this Form 10-K. Total shareholders equity increased 14.98% to $25,897 at December 31, 2000. Total equity as a percentage of assets was 6.53% at the end of 2000 versus 6.94% a year earlier. Included in shareholders equity is the net unrealized loss on securities classified as available-for-sale, which amounted to $64 at the end of 2000 against a loss of $910 as of the end of 1999. PROVISION AND ALLOWANCE FOR LOAN LOSSES 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 the full collection of the loan principal is unlikely. The level of the provision for loan losses charged to operating expense as well as the balances maintained in the allowance for loan losses is dependent upon many factors, including loan growth, changes in the composition of the loan portfolio, net charge-off levels, delinquencies, collateral values and management's assessment of current and prospective economic conditions in the Company's primary market areas. The Subsidiary Bank measures the allowance for loan losses on a quarterly or more frequent basis using three measures of reserve adequacy. The first measurement compares the allowance as a percentage of the total loan portfolio. The second test measures the allowance against various loan pools, or types, using historical reserve percentages for expectations of possible loan losses on each category. The third is a detailed evaluation by all loan 15 officers of classified or non-performing loans to ensure that an adequate allowance has been established for these individual assets. The allowance for loan losses is comprised of both allocated and unallocated allowances in order to quantify future loss potential. The allocated position represents management's assessment as to potential loss exposure based on both actual loan losses experienced historically and independent credit ratings on individual credits. The unallocated portion is that which is not specifically allocated to a particular loan or general loan category. At December 31, 2000, the allowance for loan losses was comprised of $2,892 and $925 of allocated and unallocated reserves, respectively. TABLE 9 ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
December 31, ------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Balance at beginning of year $3,114 $2,499 $2,010 $1,485 $1,402 Loan charge-offs: Commercial - Other 8 263 130 12 256 Real estate - Residential (1 to 4 family) - 105 - 1 - Real estate - Residential (5 or more) - - - - 607 Real estate - Non-Residential - - - - - Consumer and all other 2 25 25 15 33 ---------------------------------------------------- Total charge-offs 10 393 155 28 896 Recoveries: Commercial - Other 11 116 64 55 62 Real estate - Residential (1 to 4 family) 3 - - - - Real estate - Residential (5 or more) - - - 86 - Consumer and all other 4 7 - 2 3 ---------------------------------------------------- Total recoveries 18 123 64 143 65 Net (charge-offs) recoveries 8 (270) (91) 115 (831) Provision for loan losses 695 885 580 410 914 ---------------------------------------------------- Balance at end of year $3,817 $3,114 $2,499 $2,010 $1,485 =================================================== As a percent of average loans: Net loan (charge-offs) recoveries 0.00% -0.12% -0.05% 0.08% -0.69% Provision for loan losses 0.25% 0.39% 0.33% 0.28% 0.76% Allowance for loan losses as a percentage of total loans: 1.31% 1.25% 1.28% 1.21% 1.13% Allocation of allowance: Commercial - Aircraft related $477 $588 $426 $268 $137 Commercial - Other 545 609 684 772 765 Secured by real estate 1,821 621 377 11 222 Consumer 49 51 89 89 107 Unallocated 925 1,245 923 870 254 ---------------------------------------------------- Balance at end of year $3,817 $3,114 $2,499 $2,010 $1,485 =================================================== Loan balance as a percent of total loans: Commercial - Aircraft related 19% 21% 14% 11% 7% Commercial - Other 20% 17% 17% 18% 23% Secured by real estate 59% 60% 66% 68% 67% Consumer 2% 2% 3% 3% 3%
As indicated by this table, the provision for loan losses amounted to $695 for 2000 compared to $885 for 1999 and $580 in 1998. This decrease in the 2000 provision is due to the decrease in the amount of loans charged off during the year 2000 as compared to 1999. Charged off loans during 2000 totaled $10, a decrease from 1999 of $383. Absent the amount contributed to the allowance for 16 loan losses in the prior year as a result of charge-offs, the overall increase to the provision is due to the continued growth in the Company's loan portfolio. The portion of the allocation for loan losses related to those loans secured by real estate increased in 2000 from 1999 by $1,200. This is a direct result of a change made by the Company in calculating its reserve for loan losses. The allowance for loan losses amounted to $3,817 for 2000 compared to $3,114 for 1999 and $2,499 for 1998. Allowance levels are the result of the Company's analysis of potential loan losses and the adequacy level as defined by management's internal analysis. NONPERFORMING ASSETS One measurement used by management in assessing the risk inherent in the loan portfolio is the level of nonperforming assets. Nonperforming assets consist of nonaccrual loans, restructured loans, investments and other real estate owned. Nonaccrual loans are those loans which have been determined to have reasonable doubt as to the timely collectibility of interest or principal. Restructured loans are those loans whose terms or conditions have been changed and have resulted in a negative impact on the Bank compared to the original terms. Other real estate owned ("OREO") represents real property which has been acquired through foreclosure or real estate which a Subsidiary Bank has obtained possession of in satisfaction of a debt. OREO is carried at the lower of the recorded investment value of the loan or the estimated fair market value, less estimated disposal costs, of the related real estate. Past due loans are loans whose principal and interest payments are delinquent 90 days or more and are still accruing interest. The following table summarizes nonperforming assets and past due loans for the past five years as well as certain information related to interest income on nonaccrual loans: TABLE 10 ANALYSIS OF NONPERFORMING ASSETS AND PAST DUE LOANS
December 31, -------------------------------------------- 2000 1999 1998 1997 1996 ------ ---- ------ ------ ------ Nonaccrual loans $1,299 $849 $1,234 $252 $1,158 Restructured loans 422 58 75 896 954 ------ ---- ------ ------ ------ TOTAL NONPERFORMING LOANS 1,721 907 1,309 1,148 2,112 Nonperforming securities, at market - - - - 134 Other real estate owned - - - 334 334 ------ ---- ------ ------ ------ TOTAL NONPERFORMING ASSETS $1,721 $907 $1,309 $1,482 $2,580 ====== ==== ====== ====== ====== Percentage of nonperforming loans/total loans 0.59% 0.36% 0.67% 0.69% 1.61% Percentage of nonperforming assets/total assets 0.43% 0.28% 0.49% 0.64% 1.14% Interest income not recognized due to nonaccrual status of loans $109 $60 $164 $64 $282
Nonperforming assets increased as of December 31, 2000, although they still remain at very low levels as a percentage of total loans. This is a result of a strong economy and the effectiveness of the Subsidiary Bank's loan administration and workout procedures. As shown in Table 10, at December 31, 2000, nonperforming assets totaled $1,721 compared to $907 in 1999. The percentage of non-performing assets to total assets increased slightly to .43% at December 31, 2000, from .28% at December 31, 1999. The majority of this increase relates to an interest rate restructure of one loan. The loans are currently paying as agreed under the new terms. NONINTEREST INCOME Noninterest income consists primarily of service charges on customer deposit accounts. Total noninterest income decreased 28.88% to $2,285. This decrease was a result of the sale of the mortgage banking division at Heritage at the end of 1999. This sale resulted in a decrease to noninterest income of $831 from 1999. The following table analyzes the various sources of noninterest income for the years ended December 31, 1998 through 2000. 17 TABLE 11 NONINTEREST INCOME COMPONENTS
December 31, -------------------------- 2000 1999 1998 ---- ---- ---- Service charges on deposit accounts $1,831 $1,784 $1,481 Mortgage banking fees - 831 1,258 Other noninterest income 455 510 317 Net gains from sale of loans 44 87 126 Net gain (loss) on sale of securities (45) 1 (28) ------ ------ ------ Total noninterest income $2,285 $3,213 $3,154 ====== ====== ======
Service charges on deposit accounts, the largest component of noninterest income, consists of fees on both interest bearing and noninterest bearing deposit accounts and charges for items such as insufficient funds, overdrafts and stop payment requests. These charges increased 2.63% in 2000 over 1999 levels. Net gain (loss) on securities result from the sale of securities from the investment portfolio. For a review of gains and losses related to the investment portfolio, see Note 3 in the Notes to Consolidated Financial Statements found in Item 8 of this Form 10-K. NONINTEREST EXPENSE Total noninterest expense increased slightly by $594 or 4.45% in 2000 after increasing $1,409 or 11.80% in 1999. This is reflective of the incremental increase in salaries and benefits which result from the necessary staffing increases due to the loan and deposit growth pattern as well as new branch facilities. In addition, staffing was increased in connection with the participation of various commercial loans to other banking institutions. A key indicator of a bank's ability to maintain low overhead while generating net income is the bank's efficiency ratio. A lower ratio indicates a bank's ability to maintain a lower cost operation in comparison to the resulting income produced. The Company's efficiency ratio continues to improve; for the year ended December 31, 2000, the Company had a 72% efficiency ratio as compared to 73% for the prior year's period. The following table analyzes the various components of noninterest expense for the years ended December 31, 1998 through 2000. TABLE 12 NONINTEREST EXPENSE COMPONENTS
December 31, -------------------------- 2000 1999 1998 ---- ---- ---- Salaries and employee benefits: Core bank employees $7,669 $6,742 $6,003 Mortgage lending group - 761 911 ------- ------- ------- Total 7,669 7,503 6,914 ------- ------- ------- Net occupancy expense 581 627 647 Equipment expense 932 815 811 Outside fees and services 877 873 703 Advertising and business development expense 404 447 406 Supplies and postage expense 455 451 389 Data processing expense 1,083 1,080 659 Regulatory fees and insurance 272 177 169 Other operating expense 1,670 1,376 1,242 ------- ------- ------- Total noninterest expense $13,943 $13,349 $11,940 ======= ======= =======
The decrease in salaries and employee benefits for the mortgage lending group was again the result of the sale of the mortgage lending division at Heritage at the end of 1999. 18 An increase of $428 was recognized in noninterest expense other than salaries and employee benefits from $5,846 at December 31, 1999 to $6,274 at December 31, 2000. The increase is the result of overall higher equipment, regulatory and insurance costs resulting from the Company's overall asset growth. Management continues to focus on cost containment and this control of expenses remains a priority as a part of our broader goal of maximizing long-term profitability. FORWARD LOOKING STATEMENTS Statements made about the Company's future economic performance, strategic plans or objectives, revenue or earnings projections, or other financial items and similar statements are not guarantees of future performance, but are forward looking statements. By their nature, these statements are subject to numerous uncertainties that could cause actual results to differ materially from those in the statements. Important factors that might cause the Company's actual results to differ materially include, but are not limited to, the following: - Federal and state legislative and regulatory developments; - Changes in management's estimate of the adequacy of the allowance for loan losses (and/or other significant estimates such as OREO, deferred tax valuation allowance, etc.); - Changes in the level and direction of loan delinquencies and write-offs; - Interest rate movements and their impact on customer behavior and Upbancorp's net interest margin; - The impact of repricing and competitors' pricing initiatives on loan and deposit products; - Upbancorp's ability to adapt successfully to technological changes to meet customers' needs and developments in the marketplace; - Upbancorp's ability to access cost effective funding; - Economic conditions and - Recently enacted financial modernization legislation. 19 ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ON MARKET RISK While Table 3, illustrated on page 12, is a useful tool for management to assess the general positioning of the Company's balance sheet, management uses an additional measurement tool to evaluate its asset/liability sensitivity which determines exposure to changes in interest rates by measuring the change in net interest income as a percentage of capital, due to changes in rates over a one-year time horizon. Management measures such change assuming an immediate and sustained parallel shift in rates of 50, 100 and 200 basis points, both upward and downward. The model uses scheduled amortization, call date or final maturity as appropriate on all non-rate sensitive assets. The model uses repricing frequency on all variable rate assets and liabilities, it also uses a 5-year decay analysis on all non-rate sensitive deposits. Prepayment rates on fixed rate loans have been adjusted up or down by 10% per year to incorporate historical experience in both an up-rate and down-rate environment. Utilizing this measurement concept, the interest rate risk of the Company, expressed as change in net interest income as a percentage of capital over a 1-year time horizon due to changes in interest rates, at December 31, 2000 and 1999, was a follows:
BASIS POINT CHANGE ------------------ +200 +100 +50 -50 -100 -200 -------------------------------------------------------- At December 31, 2000 -0.70% -0.28% -0.23% 0.13% 0.11% -0.26% At December 31, 1999 -0.96% -0.48% -0.36% 0.35% 0.43% -0.21%
20 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA UPBANCORP, INC. CONSOLIDATED STATEMENTS OF CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) December 31, 2000 1999 - -------------------------------------------------------------------------------------- ASSETS Cash and due from banks $16,319 $11,526 Federal funds sold 12,600 4,730 Securities available-for-sale 67,426 48,426 Mortgages held-for-sale - 1,264 Loans, net of allowance for loan losses of $3,817 and $3,114 in 2000 and 1999 288,488 246,605 Premises and equipment, net 5,526 6,002 Accrued interest and other assets 6,312 6,224 -------- -------- TOTAL ASSETS $396,671 $324,777 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Demand deposits, noninterest-bearing $65,900 $53,213 Savings, NOW and money market deposits 133,345 119,309 Other time deposits 149,303 97,633 -------- -------- Total deposits 348,548 270,155 Borrowed funds 14,849 28,634 Note payable 3,000 - Accrued interest and other liabilities 4,377 3,464 -------- -------- TOTAL LIABILITIES 370,774 302,253 -------- -------- SHAREHOLDERS' EQUITY Common stock, $1 par value: 3,000,000 shares authorized; 1,000,000 issued in 2000 and 1999 1,000 1,000 Additional paid in capital 4,500 4,500 Retained earnings 23,540 20,954 Treasury stock - 164,945 shares in 2000 and 162,692 in 1999 (3,079) (3,020) Accumulated other comprehensive income (loss) (64) (910) -------- -------- TOTAL SHAREHOLDERS' EQUITY 25,897 22,524 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $396,671 $324,777 ======== ========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 21 UPBANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 2000 1999 1998 - --------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $26,198 $20,572 $16,730 Interest on mortgages held-for-sale - 86 118 Interest on federal funds sold 621 209 437 Interest and dividends on securities: Taxable 2,883 2,309 2,540 Nontaxable 388 354 215 ------ ------ ------ Total Interest Income 30,090 23,530 20,040 ------ ------ ------ INTEREST EXPENSE Interest on savings, NOW, and money market 4,343 3,020 2,670 deposits Interest on other time deposits 7,058 4,438 3,630 Interest on borrowed funds 1,579 1,089 809 Interest on note payable 125 - - ------ ------ ------ Total Interest Expense 13,105 8,547 7,109 ------ ------ ------ NET INTEREST INCOME 16,985 14,983 12,931 PROVISION FOR LOAN LOSSES 695 885 580 ------ ------ ------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 16,290 14,098 12,351 ------ ------- ------ NONINTEREST INCOME Service charges on deposit accounts 1,831 1,784 1,481 Mortgage banking fees - 831 1,258 Other noninterest income 455 510 317 Net gains from sale of loans 44 87 126 Net gains (losses) from sale of securities (45) 1 (28) ------ ------ ------ Total Noninterest Income 2,285 3,213 3,154 ------ ------ ------ NONINTEREST EXPENSE Salaries and employee benefits 7,669 7,503 6,914 Net occupancy expense 581 627 647 Equipment expense 932 815 811 Outside fees and services 877 873 703 Advertising and business development expense 404 447 406 Supplies and postage expense 455 451 389 Data processing expense 1,083 1,080 659 Regulatory fees and insurance 272 177 169 Other operating expense 1,670 1,376 1,242 ------ ------ ------ Total Noninterest Expense 13,943 13,349 11,940 ------ ------ ------ INCOME BEFORE INCOME TAXES 4,632 3,962 3,565 Income taxes 1,611 1,385 1,265 ------ ------ ------ NET INCOME $3,021 $2,577 $2,300 ====== ====== ====== Basic earnings per share $3.61 $3.00 $2.63 ======= ======= ======= Weighted average shares outstanding 836,478 859,710 875,907 ======= ======= =======
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 22 UPBANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOW
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 2000 1999 1998 - --------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $3,021 $2,577 $2,300 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 695 885 580 Depreciation and amortization 1,299 1,282 1,107 Net loss (gain) on securities 45 (1) 28 Net gains on sale of mortgage loans (44) (87) (126) Net gains on sale of other real estate owned - - (52) Change in deferred income taxes 453 (541) (179) Accretion on investment securities, net (418) (258) (118) Originations of mortgages held-for-sale (938) (48,941) (77,169) Proceeds from sales of mortgages held-for-sale 2,246 51,831 75,374 Changes in assets and liabilities: Increase in accrued interest and other assets (1,166) (120) (289) Increase in accrued interest and other liabilities 913 771 485 ------- ------- ------ Net cash provided by operating activities 6,106 7,398 1,941 ------- ------- ------ CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in federal funds sold (7,870) 5,270 (9,500) Purchases of available-for-sale securities (50,893) (40,670) (23,853) Proceeds from maturities and redemptions of available-for-sale securities 28,205 10,479 15,330 Proceeds from sale of available-for-sale securities 5,447 22,297 14,239 Proceeds from maturities and redemptions of held-to-maturity securities - 200 - Net increase in loans (42,578) (54,894) (28,934) Purchases of premises and equipment (738) (849) (1,728) Purchase of airplane financing division - - (460) Proceeds from sale of other real estate - - 386 ------- ------- ------ Net cash used in investing activities (68,427) (58,167) (34,520) ------- ------- ------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase in total deposits 78,393 44,121 27,902 Net increase (decrease) in borrowed funds (13,785) 10,537 8,060 Net increase in note payable 3,000 - - Cash dividends paid (435) (446) (438) Purchase of treasury stock (59) (1,082) (458) ------- ------- ------ Net cash provided by financing activities 67,114 53,130 35,066 ------- ------- ------ Net increase in cash and due from banks 4,793 2,361 2,487 Cash and due from banks at beginning of period 11,526 9,165 6,678 ------- ------- ------ Cash and due from banks at end of period $16,319 $11,526 $9,165 ======= ======= ====== Supplemental disclosure of cash flow information: Cash payments: Interest $12,123 $8,172 $7,017 Income taxes 1,848 1,901 1,642
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 23 UPBANCORP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Accumulated Additional Other Common Paid In Retained Treasury Comprehensive Stock Capital Earnings Stock Income Total - ------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1997 $ 1,000 $ 4,500 $16,961 $(1,480) $ 19 $21,000 -------------------------------------------------------------------- Comprehensive Income: Net income 2,300 2,300 Net unrealized gain (loss) on securities available-for-sale, net of tax of $149 234 234 ------ Comprehensive income 2,534 ------ Cash dividends: $.50 per share (438) (438) Purchase of treasury stock (458) (458) -------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 $ 1,000 $ 4,500 $18,823 $(1,938) $ 253 $22,638 -------------------------------------------------------------------- Comprehensive Income: Net income 2,577 2,577 Net unrealized (losses) on securities available-for-sale, net of tax of $(743) (1,163) (1,163) ------ Comprehensive income 1,414 ------ Cash dividends: $.52 per share (446) (446) Purchase of treasury stock (1,082) (1,082) -------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 $ 1,000 $ 4,500 $20,954 $(3,020) $ (910) $22,524 -------------------------------------------------------------------- Comprehensive Income: Net income 3,021 3,021 Net unrealized gains on securities available-for-sale, net of tax of $540 846 846 ------ Comprehensive income 3,867 ------ Cash dividends: $.52 per share (435) (435) Purchase of treasury stock (59) (59) -------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 $ 1,000 $ 4,500 $23,540 $(3,079) $ (64) $25,897 ====================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 24 UPBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS: Upbancorp, Inc. ("Upbancorp" or the "Company"), is a 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. In September 2000, Heritage Bank ("Heritage"), organized in 1977 and located in the Phoenix metropolitan area, merged into Uptown and is currently operating as a branch of Uptown. Upbancorp does not engage in any activities other than providing administrative services and acting as a holding company for Uptown. Uptown is a full-service community bank which operates eight banking offices and one loan production office in the Chicagoland area and metropolitan Phoenix area. Uptown is engaged in the general commercial banking business in addition to offering a complete range of retail banking services. Uptown conducts general banking business, both commercial and consumer including: the acceptance and servicing of demand, savings, and time deposit 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 has a wholly-owned subsidiary, Broadway Clark Building Corporation ("BCBC"), which owns all of the real estate that is used in connection with the operation of Uptown's Chicagoland area business with the exception of four facilities, which are leased. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Upbancorp and its wholly-owned subsidiary Uptown (including its wholly-owned subsidiary BCBC) 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. Based on the Company's approach to decision making, its business is comprised of a single segment and that Statement No. 131 therefore has no impact on its consolidated financial statements. SECURITIES: Securities classified as available-for-sale are those debt securities that the Subsidiary Bank intends to hold for an indefinite period of time, but not necessarily to maturity and equity securities. 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 Subsidiary 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 other comprehensive income 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. 25 LOANS AND ALLOWANCE FOR LOAN LOSSES: Loans 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, the allowance for loan losses, 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 accreted 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. 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 Subsidiary 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. These agencies may require the Banks to make additions to 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. INTANGIBLE ASSETS: Intangible assets consist of goodwill and other intangible assets which are being amortized on a straight-line basis over estimated lives of 3 to 15 years. Intangible assets, net of accumulated amortization, are included in other assets in the consolidated 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. 26 EARNINGS PER COMMON SHARE: Basic earnings per share is computed by dividing net income for the year by the average number of shares outstanding during the year. Dilutive earnings per share do not differ from basic earnings per share. STOCK SPLIT: Effective October 20, 1998, the Company increased its authorized shares of common stock from 300,000 to 3,000,000 and reduced the par value from $10 to $1. In addition, the common stock was split on a four-to-one basis. All references in the accompanying financial statements to number of shares and per share amounts have been retroactively restated to reflect these changes. RECLASSIFICATIONS: Certain amounts in the 1998 consolidated financial statements have been reclassified to conform with the 1999 and 2000 presentations. Such reclassifications have no effect on previously reported net income. EMERGING ACCOUNTING STANDARDS: In June 1998 the FASB issued Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (FAS 133). SFAS 133 requires companies to record derivatives on the balance sheet as assets or liabilities at fair value. Depending on the use of the derivative and whether it qualifies for hedge accounting, gains or losses resulting from changes in the values of those derivatives would either be recorded as a component of net income or as a change in stockholders' equity. SFAS 137 and SFAS 138 amended and deferred the effective date of SFAS 133. As a result, the Company will be required to adopt the new accounting policies effective January 1, 2001. Management does not anticipate that the adoption of the new statement will have a significant effect on the Company's financial statements. In September 2000, the FASB adopted SFAS 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, a replacement of SFAS 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES. SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS 125's provisions without reconsideration. SFAS 140 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The provisions of SFAS 140 are effective for transfers after March 31, 2001. It is effective for disclosures about securitizations and collateral and for recognition and reclassification of collateral for fiscal years ending after December 15, 2000. Management does not anticipate that the adoption of this new statement will have a significant effect on the Company's financial statements. NOTE 2. RESTRICTIONS ON CASH AND DUE FROM BANKS The Subsidiary Bank is 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 $3,221 and $2,380 at December 31, 2000 and 1999. 27 NOTE 3. SECURITIES The amortized cost and fair value of securities available-for-sale are as follows at December 31:
2000 ------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------ U.S. Treasury securities $ 10,722 $ - $ - $ 10,722 U.S. Government agencies 38,906 243 44 39,105 States and political subdivisions 6,792 86 97 6,781 Mortgage-backed securities 5,701 - 189 5,512 -------- ------- ------- -------- Total debt securities 62,121 329 330 62,120 Equity securities 5,410 - 104 5,306 -------- ------- ------- -------- Total securities available-for-sale $ 67,531 $ 329 $ 434 $ 67,426 ======== ======= ======= ======== 1999 ------------------------------------------------ U.S. Treasury securities $ 750 $ - $ 7 $ 743 U.S. Government agencies 30,938 - 678 30,260 States and political subdivisions 7,711 44 495 7,260 Mortgage-backed securities 5,700 - 212 5,488 -------- ------- ------- -------- Total debt securities 45,099 44 1,392 43,751 Equity securities 4,818 1 144 4,675 -------- ------- ------- -------- Total securities available-for-sale $ 49,917 $ 45 $ 1,536 $ 48,426 ======== ====== ======== ========
The amortized cost and fair value of securities available-for-sale at December 31, 2000, 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.
Amortized Fair Cost Value --------- -------- Due in one year or less $19,524 $19,530 Due after one year through five years 31,053 31,259 Due after five years through ten years 2,103 2,117 Due after ten years 3,740 3,702 Mortgage-backed securities 5,701 5,512 ------- ------- Total $62,121 $62,120 ======= =======
Gross gains realized were $7 in 2000, $37 in 1999 and $15 in 1998. Gross losses realized were $52 in 2000, $36 in 1999 and $43 in 1998. Investment securities carried at approximately $29,166 and $30,682 at December 31, 2000 and 1999, respectively, were pledged to secure public and trust deposits and for other purposes as required or permitted by law. 28 NOTE 4. LOANS Major classifications of loans are as follows at December 31:
2000 1999 --------- --------- Commercial - Aircraft related $ 54,614 $ 53,531 Commercial - Other 58,404 42,320 Real estate - Construction 52,637 35,686 Real estate - Residential (1 to 4 family) 32,431 30,147 Real estate - Residential (5 or more families) 30,264 27,514 Real estate - Non-Residential 58,467 55,352 Consumer and all other 5,986 5,607 Deferred loan fees, net (498) (438) --------- --------- Total loans 292,305 249,719 Less allowance for loan losses (3,817) (3,114) --------- --------- Total loans, net of allowance for loan losses $ 288,488 $ 246,605 ========= =========
Changes in the allowance for loan losses account are summarized below:
Years Ended December 31, ---------------------------------- 2000 1999 1998 ------- ------- ------- Balance at beginning of year $ 3,114 $ 2,499 $ 2,010 Provision for loan losses 695 885 580 Loans charged-off (10) (393) (155) Recoveries on loans previously charged-off 18 123 64 -------- -------- -------- Balance at end of year $ 3,817 $ 3,114 $ 2,499 ======== ======== ========
As of December 31, 2000 and 1999, the Company's recorded investment in impaired loans and the related valuation allowance are as follows:
2000 1999 -------------------- --------------------- Carrying Valuation Carrying Valuation Value Allowance Value Allowance ----- --------- ----- --------- Impaired loans Valuation allowance required $ 489 $ 177 $ - $ - No valuation allowance required 810 - 849 - ------- ------- ------ ----- Total impaired loans $ 1,299 $ 177 $ 849 $ - ======= ======= ====== =====
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, 2000 and 1999, was $945 and $795, respectively. No interest income was recognized in 2000, 1999 and 1998 on impaired loans. 29 NOTE 5. PREMISES AND EQUIPMENT The following is a summary of bank premises and equipment at December 31:
2000 1999 ------- ------- Land $ 1,106 $ 1,106 Buildings and improvements 12,669 12,660 Furniture, fixtures and equipment 8,277 7,669 -------- -------- Total cost 22,052 21,435 Accumulated depreciation (16,526) (15,433) --------- --------- Premises and equipment, net $ 5,526 $ 6,002 ========= =========
Depreciation expense on premises and equipment totaled $1,214, $1,196 and $1,054 for 2000, 1999 and 1998, respectively. The buildings, in which the main facilities of each bank are located, have stores and offices which are rented. Total rent received was $1,127, $1,132 and $1,037 in 2000, 1999 and 1998, respectively and is recorded as a reduction of net occupancy expense. NOTE 6. OTHER TIME DEPOSITS The aggregate amount of certificates of deposits of $100 or more totaled $51,104 and $36,972 at December 31, 2000 and 1999. Maturities of other time deposits are summarized as follows at December 31:
2001 $ 143,632 2002 2,025 2003 2,302 2004 898 2005 446 ---------- $ 149,303 ==========
NOTE 7. BORROWED FUNDS AND NOTE PAYABLE At December 31, 2000 and 1999, borrowed funds consisted of:
2000 1999 -------- -------- Federal funds purchased $ - $ 9,000 Securities sold under agreements to repurchase and U.S. Treasury tax and loan note accounts 849 634 Federal Home Loan Bank borrowing, due May 1, 2000, 5.93% fixed rate - 5,000 Federal Home Loan Bank borrowing, due July 3, 2000, 5.88% variable rate - 4,000 Federal Home Loan Bank borrowing, due May 1, 2001, 6.98% fixed rate 5,000 - Federal Home Loan Bank borrowing, due July 3, 2002, 6.61% variable rate 4,000 - Federal Home Loan Bank borrowing, due January 20, 2008, 5.05% fixed rate 5,000 5,000 Federal Home Loan Bank borrowing, due October 5, 2008, 4.20% fixed rate - 5,000 -------- -------- $ 14,849 $ 28,634 ======== ========
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 $29,974. 30 As required under the agreement, the advances can be collateralized by the following: qualifying 1-4 family 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. The Company has a $5 million line of credit, a secured revolving note payable, with a correspondent bank at December 31, 2000. This note had an outstanding balance of $3 million at such date. Interest is calculated on the basis of 3-month LIBOR plus 150 basis points with interest due and payable quarterly (6.40% at December 31, 2000). The expiration date of the line is April 1, 2002. The note also contains certain covenants which limit changes in capital structure, the purchase of or merger with other banks and/or businesses, and the guarantees of other liabilities and obligations. In addition, the Company must meet certain financial ratios. The Company was in compliance with all covenants of the agreement at December 31, 2000. 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. In addition, the Company adopted a Supplemental Executive Retirement Plan (the "SERP") for certain executive officers, effective February 17, 1998. The following table provides a reconciliation of the changes in the Plans' benefit obligations and fair value of assets over the two year period ended December 31, 2000 and a statement of the Plans' funded status as of December 31 of both years:
Pension Benefits Amounts in ($000) 2000 1999 - -------------------------------------------------------------------------------- Reconciliation of benefit obligation: Net obligation at beginning of the year $ 6,395 $ 7,231 Service cost 298 372 Interest cost 549 493 Actuarial (gain) loss 495 (1,370) Gross benefits paid (357) (331) --------- --------- Net obligation at end of the year $ 7,380 $ 6,395 ========= ========= Reconciliation of fair value of plan assets: Fair value of plan assets at beginning of the year $ 8,283 $ 7,924 Actual return on plan assets 330 690 Gross benefits paid (357) (331) --------- --------- Fair value of plan assets at end of the year $ 8,256 $ 8,283 ========= ========= Funded status: Funded status at end of the year $ 876 $ 1,888 Unrecognized prior service cost 575 646 Actuarial (loss) (511) (1,389) --------- --------- Net amount recognized $ 940 $ 1,145 ========= =========
The net amount recognized is recorded in the financial statements with $1,307 in other assets and $367 in other liabilities As of December 31, 2000, the benefit obligations of the defined benefit plan and the SERP were $6,533 and $846, respectively, and the fair value of plan assets of the defined benefit plan and the SERP were $8,256 and $-0-, respectively. 31 The following table provides the components of net periodic benefit cost for the plans fiscal years 2000 and 1999:
Pension Benefits Amounts in ($000) 2000 1999 ----------------- ---- ---- Service cost $ 298 $ 372 Interest cost 549 493 Expected return on plan assets (690) (660) Amortization of prior service cost 71 70 Actuarial loss (22) - -------- -------- Net periodic benefit cost $ 206 $ 275 ======== ========
The assumptions used in the measurement of the Company's benefit obligation are shown in the following table:
Pension Benefits 2000 1999 ---- ---- Weighted average assumptions as of December 31: Discount rate 7.75% 8.00% Expected return on plan assets 8.50% 8.50% Rate of compensation increase 5.00% 5.00%
NOTE 9. INCOME TAXES The provision for income taxes for the years ended December 31, 2000, 1999 and 1998, is comprised of the following amounts:
2000 1999 1998 ---- ---- ---- Current: Federal $ 951 $ 1,733 $ 1,289 State 207 193 155 Deferred: 453 (541) (179) -------- -------- -------- Total tax provision $ 1,611 $ 1,385 $ 1,265 ======== ======== ========
The components of the net deferred tax assets which are included in other assets, are as follows:
2000 1999 ---- ---- Deferred Tax Assets Allowance for loan losses and other real estate owned $ 1,206 $ 906 Depreciation 797 695 Interest on non-accrual loans 48 50 Deferred loan fees 3 4 Securities available for sale 42 582 -------- -------- Gross deferred tax assets 2,096 2,237 Deferred Tax Liabilities Pension expense 438 524 Discount accretion 30 29 Other 106 75 -------- -------- Gross deferred tax liabilities 574 628 -------- -------- Net deferred tax assets $ 1,522 $ 1,609 ======== ========
Management has determined that a valuation allowance is not required at December 31, 2000 and 1999. 32 The following table reconciles the statutory Federal income tax rate with the effective income tax as a percent of pretax income.
2000 1999 1998 ---- ---- ---- Federal income tax as statutory rate 35.00% 35.00% 35.00% Reduction/increase in taxes resulting from Tax-exempt interest (3.70) (4.20) (3.40) Graduated tax rate (1.00) (1.00) (1.00) State tax 3.00 3.20 2.90 Other, net 1.50 2.00 2.00 ----- ----- ----- Effective income tax rate 34.80% 35.00% 35.50% ===== ===== =====
NOTE 10. RELATED PARTIES The Subsidiary Bank has entered into transactions with its directors and their affiliates (related parties). The aggregate amount of loans to such related parties at December 31, 2000 and 1999 was $3,803 and $3,466, respectively. These loans were made using the same criteria and at interest rates and terms that would be comparable to loans granted to a borrower who is not an executive officer or director. During 2000, new loans and advances to such related parties amounted to $3,604 and repayments amounted to $3,267. NOTE 11. COMMITMENTS, CONTINGENCIES AND CREDIT RISK FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Subsidiary Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of their 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 Subsidiary Bank's 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 Subsidiary Bank uses 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 Subsidiary Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon an 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. Commercial and standby letters of credit are conditional commitments issued by the Bank 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 Bank holds 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 --------------- 2000 1999 ---- ---- Off-balance sheet assets Commitments to extend credit $ 77,139 $ 90,374 Letters of credit: Standby - 253 Commercial 2,247 2,064
33 The Company leases certain office facilities 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, 2000, are as follows:
2001 $ 288 2002 293 2003 211 2004 77 2005 and thereafter 745 --------- Total minimum payments $ 1,614 =========
CONTINGENCIES: In addition, the Company is defendant 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. CONCENTRATIONS OF CREDIT RISK: 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, 2000, loans to customers in Arizona were approximately $66 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. As of December 31, 2000, the Company's loan portfolio included $54,614 of loans secured by aircraft. Credit losses arising from aircraft loans compare favorably with the Company's credit loss experience on its loan portfolio as a whole. NOTE 12. DIVIDEND RESTRICTIONS AND REGULATORY CAPITAL REQUIREMENTS Bank regulations place restrictions upon the amount of dividends that can be paid to the Company by its Subsidiary Bank. The availability of dividends may be further limited because of the need to maintain capital ratios satisfactory to applicable regulatory agencies. The Company and the Subsidiary Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can cause regulators to initiate certain mandatory - and possibly additional discretionary - action that, if undertaken could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions do not apply to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Bank 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 Bank meet all capital adequacy requirements to which they are subject to at December 31, 2000. At December 31, 2000, both entities exceeded regulatory established minimums as defined for financial institutions. To be categorized as adequately capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk 34 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 the Bank's category. The Company's ratios are presented in the following table:
To be well For capital capitalized under adequacy prompt corrective Actual purposes action provisions ---------------- --------------- ----------------- As of December 31, 2000: Amount Ratio Amount Ratio Amount Ratio - ------------------------ Total Capital (to risk-weighted assets) Consolidated $29,245 9.6% $24,491 8.0% Not applicable Uptown National Bank 32,269 10.6% 24,475 8.0% $30,593 10.0% Tier 1 Capital (to risk-weighted assets) Consolidated 25,428 8.3% 12,245 4.0% Not applicable Uptown National Bank 28,452 9.3% 12,237 4.0% 18,356 6.0% Leverage (Tier 1 to average assets) Consolidated 25,428 6.5% 15,752 4.0% Not applicable Uptown National Bank 28,452 7.2% 15,741 4.0% 19,677 5.0% As of December 31, 1999: - ------------------------ Total Capital (to risk-weighted asstes) Consolidated $25,905 10.0% $20,789 8.0% Not applicable Uptown National Bank 19,894 10.1% 15,738 8.0% $19,672 10.0% Heritage Bank 5,994 9.3% 5,140 8.0% 6,425 10.0% Tier 1 Capital (to risk-weighted assets) Consolidated 22,792 8.8% 10,394 4.0% Not applicable Uptown National Bank 17,645 9.0% 7,869 4.0% 11,803 6.0% Heritage Bank 5,190 8.1% 2,570 4.0% 3,855 6.0% Leverage (Tier 1 to average assets) Consolidated 22,792 7.1% 12,798 4.0% Not applicable Uptown National Bank 17,645 7.0% 10,088 4.0% 12,610 5.0% Heritage Bank 5,190 7.2% 2,899 4.0% 3,624 5.0%
35 NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its 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 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 commitments is nominal. The estimated fair values of the Company's financial instruments were as follows at December 31,
2000 1999 ----------------------------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- FINANCIAL ASSETS Cash and due from banks $ 16,319 $ 16,319 $ 11,526 $ 11,526 Federal fund sold 12,600 12,600 4,730 4,730 Securities available-for-sale 67,426 67,426 48,426 48,426 Loans, net of mortgages held-for-sale 288,488 287,462 246,605 251,358 Accrued interest receivable 2,463 2,463 1,876 1,876 FINANCIAL LIABILITIES Deposits $ 348,548 $ 348,855 $ 270,155 $ 271,483 Borrowed funds and note payable 17,849 17,849 28,634 28,634 Accrued interest payable 2,219 2,219 1,237 1,237
36 NOTE 14. 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 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31, 2000 1999 - --------------------------------------------------------------------------------------------- ASSETS Cash $ 169 $ 129 Investment in Subsidiary Bank 28,921 22,567 Other 309 235 --------- --------- TOTAL ASSETS $ 29,399 $ 22,931 ========= ========= LIABILITIES Note payable $ 3,000 $ - Dividend declared - 109 Other liabilities 502 298 --------- --------- TOTAL LIABILITIES $ 3,502 $ 407 --------- --------- SHAREHOLDERS' EQUITY Common stock - $1 par value $ 1,000 $ 1,000 Additional paid in capital 4,500 4,500 Retained earnings 23,540 20,954 Treasury stock (3,079) (3,020) Accumulated other comprehensive income (64) (910) --------- --------- TOTAL SHAREHOLDERS' EQUITY 25,897 22,524 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 29,399 $ 22,931 ========= =========
37 NOTE 14. UPBANCORP, INC. - PARENT ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 2000 1999 1998 - -------------------------------------------------------------------------------------------- INCOME: Dividends received from bank subsidiary $ 650 $ 135 $ 2,151 Interest on short term investments 6 44 18 ----- ----- ----- Total income 656 179 2,169 ----- ----- ----- EXPENSE: Interest on note payable 125 - - Salaries and employee benefits 434 519 365 Other expense 247 145 187 ----- ----- ----- Total expense 806 664 552 ----- ----- ----- INCOME BEFORE INCOME TAXES AND UNDISTRIBUTED INCOME OF SUBSIDIARY (150) (485) 1,617 Income tax benefit 313 235 205 ----- ----- ----- INCOME BEFORE UNDISTRIBUTED INCOME OF SUBSIDIARY 163 (250) 1,822 Undistributed income of subsidiary 2,858 2,827 478 ----- ----- ----- NET INCOME $ 3,021 $ 2,577 $ 2,300 ===== ===== ===== STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 2000 1999 1998 - -------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,021 $ 2,577 $ 2,300 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed loss of subsidiary (2,858) (2,827) (478) Other, net 21 168 (49) ------ ------- ------ Net cash provided by (used in) operating activities 184 (82) 1,773 ------ ------- ------ CASH FLOWS FROM INVESTING ACTIVITIES Capital contributed to Subsidiary Bank (2,650) - - ------ ------- ------ Net cash (used in) investing activities (2,650) - - ------ ------- ------ CASH FLOWS FROM FINANCING ACTIVITIES Cash dividends paid (435) (446) (438) Proceeds from note payable 3,000 - - Treasury stock purchased (59) (1,082) (458) ------ ------- ------ Net cash provided by (used in) financing activities 2,506 (1,528) (896) ------ ------- ------ Net increase (decrease) in cash 40 (1,610) 877 Cash at beginning of year 129 1,739 862 ------ ------- ------ Cash at end of year $ 169 $ 129 $ 1,739 ======= ======= =========
38 NOTE 15. UNAUDITED INTERIM FINANCIAL DATA The following table reflects summarized quarterly data for the periods described (unaudited), in thousands, except share data:
2000 ------------------------------------------------- December 31 September 30 June 30 March 31 ----------- ------------ ------- -------- Interest income $ 8,358 $ 8,048 $ 7,181 $ 6,503 Interest expense 4,080 3,648 2,861 2,516 ------- ------- ------- ------- Net interest income 4,278 4,400 4,320 3,987 Provision for loan losses 210 150 150 185 Noninterest income 573 533 599 580 Noninterest expense 3,305 3,605 3,518 3,515 ------- ------- ------- ------- Income before income taxes 1,336 1,178 1,251 867 Income taxes 459 404 438 310 ------- ------- ------- ------- Net income $ 877 $ 774 $ 813 $ 557 ======= ======= ======= ======= Basic earnings per share $ 1.04 $ 0.93 $ 0.97 $ 0.67 Diluted earnings per share $ 1.04 $ 0.93 $ 0.97 $ 0.67 1999 ------------------------------------------------- December 31 September 30 June 30 March 31 ----------- ------------ ------- -------- Interest income $ 6,384 $ 6,093 $ 5,928 $ 5,125 Interest expense 2,438 2,257 2,040 1,812 ------- ------- ------- ------- Net interest income 3,946 3,836 3,888 3,313 Provision for loan losses 310 255 190 130 Noninterest income 819 795 833 766 Noninterest expense 3,517 3,377 3,272 3,183 ------- ------- ------- ------- Income before income taxes 938 999 1,259 766 Income taxes 316 347 452 270 ------- ------- ------- ------- Net income $ 622 $ 652 $ 807 $ 496 ======= ======= ======= ======= Basic earnings per share $ 0.74 $ 0.76 $ 0.93 $ 0.57 Diluted earnings per share $ 0.74 $ 0.76 $ 0.93 $ 0.57
39 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 Subsidiary contracts 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, Richard K. Ostrom Chairman of the Board President and Chief Executive Officer Kathleen L. Harris Senior Vice President & Chief Financial Officer 40 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, 2000 and 1999 and the related consolidated statements of income, cash flows and changes in shareholders' equity for each of the three years in the period ended December 31, 2000. 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 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, 2000 and 1999 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with generally accepted accounting principles. McGladrey & Pullen, LLP Schaumburg, Illinois March 9, 2001 41 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III 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 2001 Annual Meeting of Shareholders of the Company to be held on April 17, 2001, which is incorporated herein by reference. 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 2001 Annual Meeting of Shareholders of the Company to be held on April 17, 2001, which is incorporated herein by reference. 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 2001 Annual Meeting of Shareholders of the Company to be held on April 17, 2001, which is incorporated herein by reference. 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 2001 Annual Meeting of Shareholders of the Company to be held on April 17, 2001, 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 in the Notes to Consolidated Financial Statements found in Item 8 of this Form 10-K. 42 PART IV 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, 2000 and 1999 Consolidated Statements of Income - Years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows - Years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Changes in Shareholders' Equity - Years ended December 31, 2000, 1999 and 1998 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) Amended Certificate of Incorporation is attached hereto as Exhibit A and by-laws (filed as an Exhibit to the Registrant's Form S-14 Number 2-18746 filed with the Securities and Exchange Commission on February 8, 1983 and incorporated herein by reference). (10.1) Employment Agreement between Upbancorp, Inc. and Richard K. Ostrom (filed as an Exhibit to the Registrant's 1999 Form 10-K and incorporated herein by reference). Employment Agreement between Uptown National Bank of Chicago, Upbancorp, Inc. and Robert P. Griffiths is attached hereto as Exhibit A. (10.2) Indemnity Agreement between Upbancorp, Inc. and its Directors and Officers (filed as an Exhibit to the Registrant's 1992 Form 10-K and incorporated herein by reference). (22) Subsidiaries of the Registrant (see Item 1 which contains this information). (28) Proxy Statement for the 2001 Annual Meeting filed under separate cover March 16, 2001. (b) REPORTS ON FORM 8-K - No reports on Form 8-K were filed during the fourth quarter of 2000. 43 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: March 13, 2001 UPBANCORP, INC. --------------- (The Registrant) /s/ RICHARD K. OSTROM ---------------------- Richard K. Ostrom Chairman of the Board, 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 MARCH 13, 2001. /s/ Richard K. Ostrom Chairman of the Board March 13, 2001 - --------------------------------------- Richard K. Ostrom /s/ Stephen W. Edwards, CLU Director March 13, 2001 - --------------------------------------- Stephen W. Edwards, CLU /s/ Delbert R. Ellis Director March 13, 2001 - --------------------------------------- Delbert R. Ellis /s/ Robert P. Griffiths Director March 13, 2001 - --------------------------------------- Robert P. Griffiths /s/ Alfred E. Hackbarth, Jr. Director March 13, 2001 - --------------------------------------- Alfred E. Hackbarth, Jr. /s/ James E. Heraty Director March 13, 2001 - --------------------------------------- James E. Heraty /s/ Marvin L. Kocian Director March 13, 2001 - --------------------------------------- Marvin L. Kocian 44 EX-10.1 2 a2042354zex-10_1.txt EXHIBIT 10.1 February 13, 2001 Robert P. Griffiths 691 Rockefeller Road Lake Forest, Illinois 60045 RE: EXECUTIVE COMPENSATION AND BENEFITS Dear Mr. Griffiths: The Board of Directors is seeking to clarify its employment relationship with executive staff, and we are in the process of eliminating the more formal written contracts and replacing them with letter agreements. Your Executive Agreement expired on December 31, 2000, and this letter contains the terms of the continuing employment relationship between you and Uptown National Bank of Chicago (the "Bank") as well as Upbancorp, Inc. The benefits triggered by a change in control of the Bank will be described in a separate letter, which will be offered to you with this correspondence. With the exception of the change in control benefits, this letter, when signed by you, will supersede and replace all prior contracts and agreements, and nothing in those prior documents shall survive, except as set forth in this letter. The term of this letter agreement shall be for three (3) years, commencing on January 1, 2001 and terminating on December 31, 2003. Notwithstanding the foregoing, either party may terminate this Agreement at any time without cause with one hundred twenty (120) days notice. During 2003, this notice period shall not operate to extend the employment relationship beyond December 31, 2003. Any such termination by either party will terminate the financial obligations of the Bank to you following the conclusion of the notice period, except as set forth herein. This Agreement also will terminate immediately in the event of your death or for cause, which is defined as: (i) the commission of a criminal act involving Upbancorp, Inc. the Bank or any of their subsidiaries, (ii) willful refusal to follow direction of the Board of Directors, (iii) usurping a corporate opportunity from the Bank or Upbancorp, Inc. or (iv) repeated neglect of your duties. While you are so engaged, you will hold the position of President and Chief Executive Officer and report directly to the Chairman of the Board of Directors. Your duties may be modified from time to time by the Board in its sole discretion, subject to the exercise of your rights as described in detail below. Your salary during this time period shall be at the base rate of $185,000.00 for 2001, $192,500.00 for 2002 and $200,000.00 for 2003. Incentive compensation shall be paid to you in accordance with any incentive plans established for executive personnel and approved for your participation by the Board of Directors. In the event of your death, or if either party terminate without cause, and provided an incentive compensation plan is in place for Executive Staff at the time of your death or termination without cause, incentive compensation for the year of termination only shall be prorated, based on the number of days served in that calendar year. You will be entitled to enjoy all the benefits of employment as any other employee of the Bank. Notwithstanding the foregoing, the Bank will provide you with medical, dental and long term disability coverage at no cost to you, and this coverage will be the same or equivalent to the coverage provided other executive personnel. In addition to the life insurance benefits available to other employees, the Bank will continue to fund as it has in the past a split dollar life insurance policy under Minnesota Mutual Life Insurance Company, Policy #1989654. You will be provided with a luxury class automobile mutually acceptable to you and the Bank. Expenses and use of the automobile shall be in accordance with the policy of the Bank including your right to acquire said automobile, for its fair market value, at any time after three years from the time it was placed in service or within forty-five (45) days of termination, whichever occurs first. The Bank also shall continue to pay dues at the Onwentsia Country Club and the University Club. Subject only to your rights under COBRA and as set forth herein, all of these benefits shall cease and the automobile shall be returned upon termination of employment. As we indicated above, in the event your employment is terminated for cause, all responsibilities of the Bank and Upbancorp, Inc. will cease on the last day of employment, subject only to your rights to continue your health insurance pursuant to COBRA. In the event your employment is terminated during 2001 or 2002 without cause by the Bank, you will receive severance payments equal to twelve (12) months of compensation calculated at your base rate. In the event your employment is terminated during 2003 without cause by the Bank, you will receive severance payments at your base rate through December 31, 2003. In addition, if your employment is terminated without cause by the Bank, it will continue to pay for one (1) year or until December 31, 2003, whichever occurs first, beginning on the date your employment terminates, your club dues and your COBRA obligation for health coverage as well as allow you to continue participation under the Bank's 401(k) plan. Unless this letter agreement is renewed, no compensation of any type shall be due and payable to you after December 31, 2003. Following any termination of this Agreement, excepting therefrom a termination without cause by the Bank, and for a period of ninety (90) days immediately following any such termination, you will not, directly or indirectly, render services to any financial institution within the geographic area having a radius of ten (10) miles from the principal offices of Uptown National Bank or any of its subsidiaries, excepting therefrom only the Central Loop area of Chicago. This restriction shall apply only to positions you may hold in an executive management capacity and for institutions which offer any services competitive of those of the Bank or Upbancorp, Inc. This letter contains a designated space below for your signature. When signed by you, this letter agreement shall constitute the sole agreement between us concerning the terms and conditions of your employment, subject only to the letter concerning a change in control and the referenced pension, health and welfare plans, as well as the incentive compensation plan. Very truly yours, Richard K. Ostrom Chairman of the Board, President and Chief Executive Officer, Upbancorp, Inc. Chairman of the Board, Uptown National Bank of Chicago - --------------------------------- Robert P. Griffiths February 9, 2001 Robert P. Griffiths 691 Rockefeller Road Lake Forest, Illinois 60045 RE: CHANGE IN CONTROL BENEFITS Dear Mr. Griffiths: This letter is provided to you along with correspondence of even date describing your executive compensation and benefits. These two letters, when signed by you, will supersede and replace all prior contracts and agreements, and nothing in those prior documents shall survive, except as set forth in this letter concerning your compensation and benefits. This letter will describe the benefits you will receive in the event there is a change in control of Upbancorp, Inc. or the Uptown National Bank of Chicago (the "Bank"). Nothing in this letter is meant to supplement, reduce or modify the terms of the letter concerning your compensation and benefits, and all of those terms, including the restrictive covenant, shall be fully enforceable by either party. You will be provided with additional benefits in the event of a change in control of Upbancorp, Inc. or the Bank which results in the termination of your employment. For purposes of this letter agreement, change in control will be defined as: (i) a change in control which may be required to be reported to the Securities and Exchange Commission and/or Office of Comptroller of the Currency and/or the Board of Governors of Federal Reserve System; (ii) thirty percent (30%) or more of the then outstanding voting securities of Upbancorp, Inc. are acquired or controlled by one person, group or entity; (iii) the current members of the Board of Directors cease to be a majority (unless the newly elected directors were nominated by at least two-thirds (2/3) of the members sitting as of the date of this letter); (iv) Upbancorp, Inc. or the Uptown National Bank is sold, merger consolidated with another bank, holding company or financial services institution. If any of these events occur, the Bank will continue your salary calculated at the base rate for twenty four months, and, provided the existing pension, health and welfare plans of the Bank so allow, will continue those benefits for the same period in full force and effect. The provisions of this paragraph shall be limited in the event federal banking regulations prohibit Upbancorp, Inc. or the Uptown National Bank from continuing such benefits. The benefits set forth in this correspondence are not intended to supplement the severance payments described in the letter agreement on your compensation and benefits. In the event of the occurrence of both a change in control, as defined herein, and your termination without cause by the Bank, you will receive only the change in control benefit. This letter contains a designated space below for your signature. When signed by you, this letter agreement shall constitute the sole agreement between us concerning change in control benefits. Very truly yours, Richard K. Ostrom Chairman of the Board, President and Chief Executive Officer, Upbancorp, Inc. Chairman of the Board, Uptown National Bank of Chicago - --------------------------------- Robert P. Griffiths -----END PRIVACY-ENHANCED MESSAGE-----