<PAGE>
CONFORMED
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. (Fee Required)
For the fiscal year ended December 31, 1995.
or
/ / Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. (No Fee Required)
For the transition period from ____ to ____.
Commission file number 0-12292
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 (312) 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-$10
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-affilates of the
registrant as of February 23, 1996, (based upon the closing price as of such
date) was approximately $9,134,185.
The number of shares outstanding of the registrant's common stock, $10.00 par
value, as of February 23, 1996 was 222,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to be
held April 16, 1996, are incorporated by reference into Part III of this Form
10-K.
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UPBANCORP, INC.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
PART I PAGE
----
Item 1: Business.......................................................... 3
Item 2: Properties........................................................ 9
Item 3: Legal Proceedings................................................. 10
Item 4: Submission of Matters to a Vote of Security Holders............... 10
PART II
Item 5: Market for the Registrant's Common Equity and Related
Stockholder Matters............................................... 10
Item 6: Selected Financial Data........................................... 11
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 12
Item 8: Financial Statements and Supplementary Data....................... 24
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
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PART I
ITEM 1: BUSINESS
UPBANCORP, INC.
Upbancorp, Inc. ("Upbancorp" or the "Company") is a multi-bank holding
company organized in 1983 under the laws of the State of Delaware. Upbancorp
owns all the outstanding common stock of Uptown National Bank of Chicago
("Uptown"), organized in 1929 and located in Chicago, Illinois and Heritage
Bank ("Heritage"), organized in 1977 and located in Phoenix, Arizona. (Uptown
and Heritage are referred to as the "Subsidiary Banks"). Upbancorp does not
engage in any activities other than providing administrative services and
acting as a holding company for its Subsidiary Banks.
The Company is a publicly traded banking company with total assets of
$206 million at year-end 1995 and is headquartered in Chicago, Illinois. The
majority of the operational responsibilities of each of the Subsidiary Banks
rests with their Officers and Directors.
The Company and its Subsidiary Banks employed approximately 148
full-time equivalent employees at December 31, 1995. The Company is an equal
opportunity employer and its affirmative action programs comply with
applicable federal laws and executive orders.
SUBSIDIARY BANKS
The Company's affiliates consist of two full-service community banks,
which operate five banking offices in northern Chicago and metropolitan
Phoenix. Approximately 81% of its banking assets are related to Uptown with
the remainder at Heritage.
Both Subsidiary Banks are engaged in the general commercial banking
business in addition to offering a complete range of retail banking services.
The Subsidiary Banks conduct a general banking business which embraces all of
the usual functions, both commercial and consumer, and which they may
lawfully provide, including, but not limited to: the acceptance of deposits
to demand, savings and time accounts and the servicing of such accounts;
commercial, industrial, consumer and real estate lending; collections; safe
deposit box operations; and other banking services tailored for both
commercial and retail clients.
Uptown has one wholly-owned subsidiary, Broadway Clark Building
Corporation ("BCBC"), which is an Illinois corporation. BCBC owns all of the
real estate that is used in connection with the operation of Uptown's
business with the exception of one facility at 5345 N. Sheridan Road, which
is leased. The business operations of Uptown Safe Deposit Company ("SDC"),
which formally rented vault space and safe deposit boxes to Uptown and the
general public, were acquired by Uptown effective January 1, 1996.
SUPERVISION AND REGULATION
The Company and its Subsidiary Banks are subject to regulation and
supervision by various governmental regulatory authorities including, but not
limited to, the Federal Reserve Board (the "FRB"), the Office of the
Comptroller of the Currency (the "OCC"), the Federal Deposit Insurance
Corporation (the "FDIC"), the Arizona State Banking Department, the
Securities and Exchange Commission (the "SEC"), the Internal Revenue Service
and state taxing authorities. Financial institutions and their holding
companies are extensively regulated under federal and state law. The effect
of such statutes, regulations and policies can be significant and cannot be
predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and the Subsidiary Banks, regulate, among
other things, the scope of business, investments, reserves against deposits,
capital levels relative to operations, the nature and amount of collateral
for loans, the establishment of branches, mergers, consolidations and
dividends. This supervision and regulation is intended primarily for the
protection of the FDIC's Bank Insurance Fund and the depositors, rather than
the shareholders of financial institutions.
The Company is subject to supervision and regulation by the Board of
Governors of the Federal Reserve System, the FRB, under the Bank Holding
Company Act of 1956, as amended.
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Uptown is chartered under the National Bank Act, as amended, and is
subject to the examination, supervision, reporting and enforcement
requirements of the OCC, as the chartering authority for national banks, and
the FDIC as the administrator of the Bank Insurance Fund. The Bank is a
member of the Federal Reserve System.
Heritage is chartered under the banking laws of Arizona and is subject
to the examination, supervision, reporting and enforcement requirements of
the Arizona State Banking Commission under the banking laws of Arizona and
the FDIC under the Federal Deposit Insurance Act, as amended.
The deposits of the Subsidiary Banks are insured by the Bank Insurance
Fund of the FDIC to the extent permitted by law.
The Company's common stock is registered with the SEC under the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Consequently, the Company is subject to the information proxy
solicitation, insider trading and other restrictions and requirements of the
SEC under the Securities Exchange Act of 1934.
The following references to material statutes and regulations affecting
the Company and its subsidiaries are brief summaries thereof and are
qualified in their entirety by reference to such statutes and regulations.
Any change in applicable laws or regulations may have a material effect on
the business of the Company and its subsidiaries.
RIEGLE-NEAL INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT OF 1994
On September 29, 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act was signed into law. This federal law effectively eliminated
the state law barriers to interstate banking and branching - laws that
previously had been left to the domain of the states. The new law will be
phased in over a two year period beginning in 1995.
INTERSTATE BANKING
Illinois bank holding companies are permitted to acquire banks and bank
holding companies, and be acquired by bank holding companies located in any
state which authorizes such acquisitions under qualifications and conditions
which are not unduly restrictive, as determined by the Commissioner of
Illinois, when compared to those imposed under Illinois law. Under recently
enacted interstate banking legislation, adequately capitalized and managed
bank holding companies are permitted to acquire control of a bank in any
state. These acquisitions are subject to approval by the various states in
addition to the FRB, based on specific criteria, such as: the number of years
the bank has been in existence and concentration limits both nationwide and
within the state.
INTERSTATE BRANCHING
Recently enacted interstate branching legislation permits (effective
June 1, 1997) banks to merge across state lines, thereby creating a main bank
in one state with branches in other states. States may "opt-in" prior to the
effective date or may "opt-out" of interstate branching transactions. Once
state law is established, approval of interstate bank mergers will be subject
to certain conditions: adequate capitalization; adequate management;
Community Reinvestment Act compliance; specific deposit concentration limits;
and compliance with federal and state antitrust laws. An interstate merger
transaction may involve the acquisition of a branch without the acquisition
of the bank only if the law of the state in which the branch is located
permits out-of-state banks to acquire a branch of a bank in that state
without acquiring the bank. Following the consummation of an interstate
transaction, the resulting bank may establish additional branches at any
location where any bank involved in the transaction could have established a
branch under applicable federal or state law, if such bank had not been a
party to the merger transaction.
The effects on the Company of such recent changes in interstate banking
and branching laws cannot be accurately predicted, but it is likely that
there will be increased competition from national and regional banking firms.
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BANK HOLDING COMPANY ACT OF 1956, AS AMENDED
A bank holding company is subject to regulations under the Bank Holding
Company Act of 1956, as amended (the "Act"), and must register with the FRB
under that Act. A bank holding company is required by the Act to file an
annual report of its operations and such additional information as the FRB
may require and is subject, along with its subsidiaries, to examination by
the FRB. The FRB has jurisdiction to regulate the terms of certain debt
issues of bank holding companies including the authority to impose reserve
requirements. In addition, the Act regulates acquisitions of assets of other
banks along with the purchase of non-bank entities within specific guidelines.
FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT OF 1989
The passage of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") resulted in significant changes in the
enforcement powers of federal banking agencies, and more significantly, the
manner in which the thrift industry is regulated. While FIRREA's primary
purpose was to address public concern over the financial crises of the thrift
industry through the imposition of strict reforms on that industry, FIRREA
grants bank holding companies more expansive rights of entry into "the
savings institution" market through the acquisition of both healthy and
failed savings institutions. Under the provision of FIRREA, a bank holding
company can expand its geographic market or increase its concentration in an
existing market by acquiring a savings institution, regardless of its
financial condition or concentration levels, but it cannot expand its product
market by acquiring a savings institution.
Under FIRREA, a depository institution insured by the FDIC can be held
liable for any loss incurred by, or reasonably expected to be incurred by,
the FDIC in connection with (i) the default of a commonly controlled
FDIC-insured depository institution or (ii) any assistance provided by the
FDIC to a commonly controlled FDIC-insured depository institution in danger
of default (the "Cross Guarantee"). "Default" is defined generally as the
appointment of a conservator or receiver and "in danger of default" is
defined generally as the existence of certain conditions indicating either
that there is no reasonable prospect that the institution will be able to
meet the demands of its depositors or pay its obligations in the absence of
regulatory assistance, or that its capital has been depleted and there is no
reasonable prospect that it will be replenished in the absence of regulatory
assistance. The Cross Guarantee thus enables the FDIC to assess a bank
holding company's healthy Bank Insurance Fund members for the losses of any
of such bank holding company's failed Bank Insurance Fund members. Cross
Guarantee liabilities are generally superior in priority to obligations of
the depository institution to its shareholders due solely to their status as
shareholders and obligations to other affiliates.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 (the "FDIC Improvement Act") was signed into law. The
regulatory framework of the FDIC Improvement Act introduced a comprehensive
and fundamentally changed approach to banking supervision, generally
subjecting banking institutions to significantly increased regulation and
supervision. Some of the provisions contained in the FDIC Improvement Act
include the implementation of a risk-related premium system for FDIC-insured
deposits, revisions in the process of supervision and examination for
depository institutions, and federal deposit insurance reforms. Selected
provisions of the FDIC Improvement Act are summarized below:
FDIC INSURANCE PREMIUMS
During 1993, the final rule for implementing the FDIC's Risk Related
Premium System ("RRPS") was issued. Under the RRPS, financial institutions
are placed into capital groups and supervisory subgroups. The three capital
groups, which are based upon the institution's risk-based (tier 1 and total)
and leverage capital ratios defined the institution as "well-capitalized",
"adequately capitalized" or "under-capitalized". The institution's
supervisory subgroup classification is based upon the composite rating that
is assigned and communicated to the institution in writing by its primary
federal regulator. Based upon a combination of the capital group and
supervisory subgroup classifications, the institution is assessed a deposit
insurance assessment rate, as revised in January 1996, ranging from $.00 to
$.27 for every $100 of insured deposits.
In June, 1995, the Bank Insurance Fund reached a required 1.25% of total
estimated insured deposits. Premiums were refunded in September, 1995, to all
banks contributing to the premium system for a four month period to reduced
premium rates ranging, at that time, from $.04 to $.31 for every $100 of
insured deposits.
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DEPOSIT INSURANCE CHANGES
Deposit insurance changes promulgated by the FDIC Improvement Act impose
new limits on uninsured deposits that had previously received de facto
protection under the "too big to fail" policy. The FDIC Improvement Act
retains the $100,000 deposit insurance limit, and precludes payment to any
uninsured depositors in excess of $100,000 per depositor. Multiple accounts
require the same aggregation method as was contained in the previous law,
which is that only those deposits maintained in the "same capacity and the
same right" for the benefit of the depositor in his or any other name are
considered amounts due to one depositor. Another deposit insurance change
includes the requirement that the FDIC's resolution of failed institutions be
accomplished in the least costly manner.
Accordingly, in the case of the sale by the FDIC of substantially all of
a failed institution's assets, subject to its liabilities, the FDIC would be
required to compare the cost of alternative resolution transactions with the
cost of paying insured depositors and liquidating the institution. After
December 31, 1994, the FDIC Improvement Act prohibits the FDIC from taking
any action that would have the effect of increasing losses to the Bank
Insurance Fund by protecting uninsured depositors and creditors of failed
institutions.
Non-capital safety and soundness standards for banks were also
established through the FDIC Improvement Act, the failure of which would
trigger regulatory actions against the financial institution, possibly
including restrictions on asset growth or the imposition of the requirement
for higher tangible capital. These standards include operational and
managerial standards, asset quality and earnings standards, and compensation
standards. Known as "tripwire" standards, any bank that fails to comply with
these standards would be required to file a compliance plan with its primary
regulators detailing how the bank will achieve compliance.
As a result of the FDIC Improvement Act and other new regulations and
guidelines that followed, regulatory agencies are placing greater emphasis on
the responsibilities of management and the board of directors in addition to
increased emphasis on their compliance examinations. It is anticipated that
this direction will continue and recent emphasis of laws and regulations will
not shift in the near future.
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.
In addition to the FRB, the Company's earnings are also affected by the
FDIC insurance premiums and the annual fees charged by the various regulatory
authorities. The Company cannot fully predict the nature or the extent of any
effect which such fiscal and monetary policies may have on its business and
earnings.
COMPETITION
The principal methods of competition between commercial banks is
generally expressed in terms of price, including interest rates paid on
deposits and interest rates charged on borrowings, fees charged on fiduciary
services, quality of services to customers, ease of access to services, and
the offering of additional services. More recently, technological advances
such as telebanking, point-of-sale debit cards and electronic data
interchange have also resulted in intensified competition with traditional
banking distribution systems.
Both Illinois and Arizona are highly competitive markets for banking and
related financial services. Since these areas are the Company's primary focus
markets, the Subsidiary Banks are exposed to varying types and levels of
competition. In general, each Subsidiary Bank competes, anticipates and
responds within each individual market area. Both Subsidiary Banks compete
and rely heavily on the high level of quality service provided to our
customers. The Company has seen the level of competition and number of
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competitors in its market places increase in recent years and expects a
continuation of these competitive market conditions.
CAPITAL GUIDELINES
The FRB, the OCC and the FDIC have adopted risk-based capital guidelines
to provide a framework for assessing the adequacy of the capital of banks and
bank holding companies (collectively "banking institutions"). These
guidelines, which became effective in their current form on December 31,
1992, apply to all banking institutions regardless of size and are used in
the examination and supervisory process as well as in the analysis of
applications to be acted upon by the regulatory authorities. These guidelines
require banking institutions to maintain capital based on the credit risk of
their operations.
The risk-based capital guidelines are designed to require the
maintenance of capital commensurate with both on and off-balance sheet credit
risks. The minimum ratios established by the guidelines are based on both
tier 1 and total capital to total risk-based assets. Total risk-based assets
are calculated by assigning each on-balance sheet asset and off-balance sheet
item to one of four risk categories depending on the nature of each item. The
amount of the items in each category is then multiplied by the risk-weight
assigned to that category (0%, 20%, 50% or 100%). Total risk-based assets
equals the sum of the resulting amounts. Tier 1 capital is generally defined
as shareholders' equity less intangible assets and total capital is generally
defined to include Tier 1 capital plus limited levels of the allowance for
loan losses.
In addition to the risk-based capital requirements, the FRB, the OCC and
the FDIC require institutions to maintain a minimum leveraged-capital ratio
to supplement the risk-based capital guidelines. The leverage ratio is
intended to ensure that adequate capital is maintained against risks other
than credit risk.
During 1994, the federal banking regulators announced a joint decision
not to modify risk-based capital and leverage requirements for regulatory
capital to reflect the impact of unrealized holding gains and losses for
securities classified as available-for-sale. This decision, which was largely
the result of regulatory and industry concerns about resulting volatility in
regulatory capital ratios, was made in response to the Financial Accounting
Standards Board's ("FASB") issuance of Statement of Financial Accounting
Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and
Equity Securities".
The Company and the Subsidiary Banks exceed the minimum required capital
guidelines for both risk-based capital ratios and the leverage ratio at
December 31, 1995. A further discussion of the capital guidelines is included
in the Capital Resources section under Item 7 of this Form 10-K.
DIVIDENDS
GENERAL
In addition to the capital guidelines provided in the discussion above,
there are various national and state banking regulations which limit the
ability of the Subsidiary Banks to pay dividends and thereby limiting the
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, please see the footnote entitled
"Statutory/Regulatory Restrictions" in the Notes to Consolidated Financial
Statements found elsewhere in this Form 10-K.
In June, 1992, at the request of the Federal Reserve Bank of Chicago
("Reserve Bank"), the Company's Directors adopted a resolution that requires
the Company to notify the Reserve Bank in writing 30 days prior to the
declaration of dividends, and obtain prior written approval of the Reserve
Bank before incurring debt. Management believes that the Company has been in
compliance with all the provisions of the resolution, which may not be
amended or rescinded without the prior approval of the Reserve Bank.
NATIONAL BANKING ASSOCIATION RESTRICTIONS
Uptown is a national banking association, and is limited with respect to
the amount of dividends which they can pay to their shareholders under
Sections 56 and 60 of the National Bank Act.
Section 56 restricts a national bank from paying dividends if it would
impair the institution's capital by barring any payments in excess of "net
profits then on hand". Section 56 further requires that a bank deduct
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losses and bad debts from "net profits then on hand". It also specifies that
a portion of a bank's capital surplus account may be included as "net profits
then on hand" to the extent that it represents earnings from prior periods.
Section 60 requires the OCC's approval if the total of all dividends
declared in any calendar year will exceed the institution's net profits of
that year combined with its retained net profits of the preceding two years,
less any required transfers to surplus. In calculating its net profits under
Section 60 a national bank may not add back provisions made to its allowance
for loan losses nor deduct net charge-offs.
ARIZONA STATE-CHARTERED BANK RESTRICTIONS
Under the provisions of the Arizona Bank Code, dividends may not be
declared by state-chartered banks unless they are made in compliance within
the banking laws of Arizona. Additionally, the payment of dividends by a
state-chartered bank whose deposits are insured by the Bank Insurance Fund,
is affected by the requirement to maintain minimum capital pursuant to the
capital adequacy guidelines issued by the FDIC.
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ITEM 2: PROPERTIES
The following table summarizes the Company and Subsidiary Banks'
properties by location:
<TABLE>
<CAPTION>
AFFILIATE PROPERTY TYPE/LOCATION OWNERSHIP SQUARE FOOTAGE
- --------- ---------------------- --------- ---------------
<S> <C> <C> <C>
THE COMPANY 4753 N. Broadway -- --
Chicago, Illinois
UPTOWN Main Office:
4753 N. Broadway Owned 149,000(Note 1)
Chicago, Illinois
Banking Office:
6041 N. Clark Street Owned 2,100(Note 1)
Chicago, Illinois
Banking Office:
5345 N. Sheridan Road Leased 1,500
Chicago, Illinois
HERITAGE Main Office:
4222 E. Camelback Road Leased 4,000
Suite J200
Phoenix, Arizona
Banking Office:
4222 E. Camelback Road Leased 4,000
Suite J100
Phoenix, Arizona
Banking Office:
1333 W. Broadway Owned 13,900(Note 2)
Tempe, Arizona
Loan Production Office:
3165 E. Lincoln Leased 375
Phoenix, Arizona
</TABLE>
In addition to the banking locations listed above, the Subsidiary Banks
own 12 automatic teller machines, strategically located within the
subsidiaries' market places.
At December 31, 1995, the properties and equipment of the Company had an
aggregate net book value of approximately $5.8 million.
Note 1: Uptown's locations are owned by its wholly-owned subsidiary,
BCBC. Uptown utilizes approximately 49,000 square feet of its main office and
the rest of the facility is leased out by BCBC to independent third parties.
Note 2: Heritage leases approximately 3,130 square feet of its Tempe
location to an independent third party.
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ITEM 3: LEGAL PROCEEDINGS
Neither the Company nor its Subsidiary Banks are party to any
litigation, which in the judgment of management after consultation with
counsel, would have a material effect on the financial position or results of
operations of the Company or Subsidiary Banks.
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 1995.
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, 1995, there were 376 shareholders
of record. The following table sets forth common stock information during
each quarter of 1995 and 1994.
<TABLE>
<CAPTION>
(unaudited)
1995 1994
--------------------------------- ----------------------------------
Fourth Third Second First Fourth Third Second First
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MARKET PRICE OF
COMMON STOCK:
High $63.00 $60.00 $60.25 $57.88 $57.63 $57.50 $59.75 $55.00
Low 58.00 60.00 57.50 57.50 57.50 57.50 57.00 55.00
Quarter-End 60.00 60.00 60.25 57.50 57.50 57.50 57.00 55.00
CASH DIVIDENDS PER SHARE 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50
</TABLE>
A discussion regarding the regulatory restrictions applicable to the
Subsidiary Banks' ability to pay dividends is included in the Dividends
Section under Item 1 of this Form 10-K and footnote 10 in the Notes to
Consolidated Financial Statements found elsewhere in this Form 10-K.
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ITEM 6: SELECTED FINANCIAL DATA
The following Selected Financial Data is not included by the report of
independent public accountants and should be read in conjunction with the
consolidated financial statements and accompanying notes included elsewhere
in this Form 10-K. A more detailed discussion and analysis of factors
affecting the Company's financial position and operating results is presented
in Management's Discussion and Analysis of Financial Condition and Results of
Operations found under Item 7 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, 1995 is presented in the following table:
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA YEARS ENDED DECEMBER 31,
-----------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Interest income $ 15,312 $ 13,884 $ 13,292 $ 14,796 $ 16,056
Interest expense 5,383 4,884 5,112 6,480 8,612
-------- -------- -------- -------- -------
Net interest income 9,929 9,000 8,180 8,316 7,444
Provision for loan losses 717 291 772 640 809
Other income 1,982 1,790 1,857 1,840 1,427
Other expense 9,551 9,447 8,618 7,905 7,147
-------- -------- -------- -------- --------
Income before income taxes 1,643 1,052 647 1,611 915
Applicable income taxes 625 246 127 434 162
-------- -------- -------- -------- --------
Net income before cumulative effect
of a change in accounting principle 1,018 806 520 1,177 753
Cumulative effect of a change in
accounting principle for income taxes -- -- 183 -- --
-------- -------- -------- -------- --------
Net income $ 1,018 $ 806 $ 703 $ 1,177 $ 753
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
PER SHARE DATA:
Net income $ 4.59 $ 3.63 $ 3.14 $ 5.17 $ 3.21
Cash dividends declared 2.00 2.00 2.00 2.00 2.00
Book value 83.04 78.00 80.56 79.13 74.98
Market price 60.00 57.50 52.25 50.50 49.00
BALANCE SHEET HIGHLIGHTS:
Assets $206,341 $210,234 $205,435 $199,726 $195,968
Loans, net of unearned discount 111,208 98,518 92,683 107,506 100,757
Deposits 180,773 186,087 184,935 179,500 174,463
Shareholders' equity 18,434 17,316 17,884 17,748 17,435
PERFORMANCE RATIOS:
Return on average assets .49% .39% .35% .59% .39%
Return on average shareholders' equity 5.66% 4.55% 3.90% 6.66% 4.28%
</TABLE>
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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
section headed 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 1995 totaled $1,018 or $4.59
per share. This is compared to net income and earnings per share of $806 or
$3.63 and $703 or $3.14 for 1994 and 1993, respectively. The results of 1995
represent a 26% improvement in net income from 1994 and a 45% improvement
over 1993. As we noted last year and, again, consistent in the current year,
the earnings improvement is mostly attributable to increased net interest
income.
Return on average shareholders' equity for 1995 was 5.66% as compared to
4.55% in 1994 and 3.90% in 1993. Return on average assets for 1995 was .49%
as compared to .39% in 1994 and .35% in 1993.
Non-performing loans decreased during the past three year period.
Non-performing loans totaled $3,799 or 3.42% of net loans at December 31,
1995 as compared to 4.01% in 1994 and 4.24% in 1993. Non-performing loans
totaled $3,949 and $3,927 in 1994 and 1993, respectively.
Upbancorp continues to maintain a strong capital structure at December
31, 1995 as a result of the improving earnings level and the historical level
of shareholders' investment. Combined capital levels, as well as individual
Subsidiary Banks' capital ratios, are above regulator established minimums.
NET INTEREST INCOME
The major source of income for the Company is net interest income. In
1995, net interest income provided 83% of Upbancorp's net revenues (net
interest income plus non-interest income), compared with 83% in 1994 and 81%
in 1993.
Net interest income represents the difference between interest income
and fees earned on loans, securities and other earning assets and interest
expense paid for the funding sources used to finance those assets. This is
impacted by both the volume of earning assets and paying liabilities and the
rates earned and paid, respectively, on those assets and liabilities. Net
interest margin represents net interest income as a percentage of total
interest earning assets.
The following is a summary of net interest margin and net interest
income. For purposes of this discussion, both have been adjusted to a fully
tax equivalent basis for the various tax exempt loans and securities.
12
<PAGE>
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
(unaudited)
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------- ----------------------------- -----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Time deposits in other banks $ -- $ -- -- $ 136 $ 5 3.68% $ 87 $ 3 3.45%
Investment securities:
Taxable 72,338 4,318 5.97% 83,480 4,442 5.32% 68,454 3,905 5.70%
Non-taxable (1)(2) 1,668 128 7.67% 2,264 276 12.19% 5,373 609 11.33%
Federal funds sold 9,933 584 5.88% 9,037 367 4.06% 10,121 302 2.98%
Mortgages held-for-sale 580 46 7.93%
Loans, net of unearned
discount (2)(3) 106,404 10,279 9.66% 93,129 8,881 9.54% 96,898 8,666 8.94%
--------- -------- -------- -------- -------- -------- --------- -------- --------
Total interest earning
assets (1)(2)(3) 190,923 $15,355 8.04% 188,046 $13,971 7.43% 180,933 $13,485 7.45%
--------- -------- -------- -------- -------- -------- --------- -------- --------
Cash and due from banks 8,628 8,712 8,953
Reserve for loan losses (1,749) (1,574) (1,975)
Other assets 10,567 13,492 14,161
-------- -------- ---------
Total assets $208,369 $208,676 $202,072
-------- -------- ---------
-------- -------- ---------
LIABILITIES &
SHAREHOLDERS' EQUITY:
Savings, NOW and
money market deposits $102,400 $ 2,629 2.57% $110,290 $ 2,769 2.51% $107,337 $ 2,776 2.59%
Other time deposits 48,561 2,414 4.97% 47,180 1,962 4.16% 49,948 2,321 4.65%
Other borrowed funds 5,585 340 6.09% 3,218 153 4.75% 532 15 2.82%
--------- ------- -------- -------- -------- -------- --------- -------- --------
Total interest bearing
liabilities 156,546 $ 5,383 3.44% 160,688 $ 4,884 3.04% 157,817 5,112 3.24%
--------- ------- -------- -------- -------- -------- --------- -------- --------
Demand deposits 32,439 28,933 24,657
Other liabilities 1,398 1,348 1,587
Shareholders' equity 17,986 17,707 18,011
-------- -------- ---------
Total liabilities and
shareholders' equity $208,369 $208,676 $202,072
-------- -------- ---------
-------- -------- ---------
Net interest income/margin (1)(3) $ 9,972 4.60% $ 9,087 4.39% $ 8,373 4.21%
------- ------- -------- ------- ------- -------
------- ------- -------- ------- ------- -------
</TABLE>
(1) Interest income and yields on non-taxable securities and loans are
reflected on a tax equivalent basis based upon a statutory Federal income
tax rate of 34% for 1995, 1994 and 1993.
(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.
(3) Loan fees included in the above interest income computations total $895,
$1,057, and $750 for the years ended December 31, 1995, 1994, and 1993,
respectively. At December 31, 1995, 1994, and 1993, deferred loan and
commitment fee income, net of direct loan origination costs, totaled $232,
$192, and $184, respectively.
13
<PAGE>
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
(unaudited)
<TABLE>
<CAPTION>
1995 COMPARED TO 1994 Interest Income/Expense Increase/(Decrease) due to:
- --------------------- ----------------------------- --------------------------
Increase Volume/
1995 1994 (Decrease) Volume Rate Rate
------- ------- ---------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Time deposits in other banks $ -- $ 5 $ (5) $ (5) $ -- $ --
Investment securities:
Taxable 4,318 4,442 (124) (593) 541 (72)
Non-taxable (1) 128 276 (148) (73) (102) 27
Federal funds sold 584 367 217 37 164 16
Mortgages held-for-sale 46 -- 46 46 -- --
Loans, net of unearned discount 10,279 8,881 1,398 1,043 318 37
------- ------- ---------- ------ ------ -------
Total interest income (1) $15,355 $13,971 $ 1,384 $ 455 $ 921 $ 8
------- ------- ---------- ------ ------ -------
------- ------- ---------- ------ ------ -------
Savings, NOW and money market deposits 2,629 2,769 (140) (198) 63 (5)
Other time deposits 2,414 1,962 452 58 383 11
Other borrowed funds 340 153 187 112 43 32
------- ------- ---------- ------ ------ -------
Total interest expense 5,383 4,884 499 (28) 489 38
------- ------- ---------- ------ ------ -------
Net interest income 9,972 9,087 885 483 432 (30)
------- ------- ---------- ------ ------ -------
------- ------- ---------- ------ ------ -------
<CAPTION>
1994 COMPARED TO 1993 Interest Income/Expense Increase/(Decrease) due to:
----------------------------- --------------------------
Increase Volume/
1994 1993 (Decrease) Volume Rate Rate
------- ------- ---------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Time deposits in other banks $ 5 $ 3 $ 2 $ 2 $ -- $ --
Investment securities:
Taxable 4,442 3,905 537 858 (263) (58)
Non-taxable (1) 276 609 (333) (352) 46 (27)
Federal funds sold 367 302 65 (32) 109 (12)
Loans, net of unearned discount 8,881 8,666 215 (337) 574 (22)
------- ------- ---------- ------ ------ -------
Total interest income (1) $13,971 $13,485 $ 486 $139 $466 $(119)
------- ------- ---------- ------ ------ -------
------- ------- ---------- ------ ------ -------
Savings, NOW and money market deposits 2,769 2,776 (7) 76 (81) (2)
Other time deposits 1,962 2,321 (359) (129) (244) 14
Other borrowed funds 153 15 138 76 10 52
------- ------- ---------- ------ ------ -------
Total interest expense 4,884 5,112 (228) 23 (315) 64
------- ------- ---------- ------ ------ -------
Net interest income $ 9,087 $ 8,373 $ 714 $ 116 $ 781 (183)
------- ------- ---------- ------ ------ -------
------- ------- ---------- ------ ------ -------
</TABLE>
(1) Interest income and yields on nontaxable securities and loans are
reflected on a tax equivalent basis based upon a statutory Federal
income tax rate of 34% for 1995, for 1994 and 1993.
Net interest income, on a tax equivalent basis, increased by 9.74% or
$885 in 1995 over 1994 after increasing by 8.53% or $714 in 1994 compared to
1993. The tax equivalent net interest margin increased to 4.60% for 1995 as
compared to 4.39% in 1994 and 4.21% in 1993.
The 1995 increase in net interest income was positively affected by
primarily both volume variance as well as variances directly attributable to
rate fluctuations. A 55% or $483 positive variation is attributable to volume
fluctuations and 49% or $432 to rate changes; the remaining small fluctuation
is due to a combination of volume and rate.
The net positive volume variance is primarily attributable to
fluctuations within the loans and securities categories. The largest positive
fluctuation of $1,043 between 1995 and 1994, was related to
14
<PAGE>
commercial and real estate loan growth. Partially offsetting this positive
fluctuation is a negative volume impact of $666 due to the reduction in
investment securities.
Volume variances related to the placement of liabilities within the
balance sheet positively affected net interest income by $28 as depositors
transferred money from shorter-term transactional deposits into longer term
fixed rate time deposits. As Table 1 depicts, this is due to the steady rate
index of the former category as compared to the rate increases recognized in
the latter.
The net positive fluctuations attributable to rate are reflective of
steady rate increases for both earning assets as well as paying liabilities.
Rates paid on average earning assets increased by .61% as compared to rate
increases of .40% attributable to interest bearing liabilities.
FUNDS MANAGEMENT ANALYSIS
The earning asset portfolio of community banks is typically the leading
determinate of performance for the institution. This is because the largest
percentage of total income for the bank is attributable to net interest
income. The policies and practices for managing liquidity risk and interest
rate risk are set by the Subsidiary Banks' Funds Management Committees
("FMCs") to ensure maximum returns within safe and sound risk parameters. The
FMCs monitor exposures in view of market developments and the Banks'
financial conditions, set guidance for interest rate risk management
decisions, ensure consistency in the measurement of risk and monitors
liquidity and capital adequacy. In this capacity, the FMCs place 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
FMCs establish pricing policies for the Subsidiary Banks' products and
services.
We have recently increased the Subsidiary Banks' FMCs' role and related
risk management processes. Special emphasis is warranted because of the
importance of the asset and liability management process in determining the
Subsidiary Banks' performance. Innovative new applications of funds
management have been initialized by the Subsidiary Banks such as simulation
modeling to measure the effects of varying interest rate scenarios and
balance sheet strategies on net interest income.
INTEREST RATE SENSITIVITY MANAGEMENT
Interest rate risk is the degree to which market interest rate
fluctuations can effect 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, 1995 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.
15
<PAGE>
TABLE 3
REMAINING MATURITY OR EARLIEST POSSIBLE PRICING
(unaudited)
<TABLE>
<CAPTION>
Up to After
3 3-12 1-3 3-5 5
Months Months Years Years Years Total
------- -------- ------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Federal funds sold $ 8,100 -- -- -- -- $ 8,100
Investment securities (1) $24,638 $ 7,113 $16,828 $ 3,340 $14,166 66,085
Loans and mortgages held-for-sale (1) 56,644 14,806 21,651 13,845 5,074 112,020
------- -------- ------- ------- ------- --------
Total Rate Sensitive Assets 89,382 21,919 38,479 17,185 19,240 186,205
------- -------- ------- ------- ------- --------
RATE SENSITIVE LIABILITIES:
Savings, NOW, and money market deposits 26,394 26,505 30,496 13,642 -- 97,037
Other time deposits 13,684 21,497 15,127 1,358 -- 51,666
Other borrowed funds 5,230 -- -- -- -- 5,230
------- -------- ------- ------- ------- --------
Total Rate Sensitive Liabilities 45,308 48,002 45,623 15,000 -- 153,933
------- -------- ------- ------- ------- --------
INTEREST SENSITIVITY GAP:
Incremental $44,074 $(26,083) $(7,144) $2,185 $19,240 $ 32,272
------- -------- ------- ------- ------- --------
------- -------- ------- ------- ------- --------
Cumulative $44,074 $ 17,991 $10,847 $13,032 $32,272
CUMULATIVE INTEREST SENSITIVE
GAP AS A PERCENTAGE OF
TOTAL EARNING ASSETS 24% 10% 6% 7% 17%
</TABLE>
(1) Loans and securities on a non-accrual basis are not included as a part
of this analysis.
Table 3 reflects a cumulative asset sensitive balance sheet within
acceptable guidelines established by Company policy. This will more
positively affect net interest income if interest rates rise then if they
fall. Upbancorp and the Subsidiary Banks follow a policy of 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.
As previously discussed, Upbancorp is in the process of developing and
utilizing a more dynamic approach to measuring interest rate risk by
conducting simulations that demonstrate effects that would occur in net
interest income under various interest rate scenarios and balance sheet
structures.
The following tables show the Company's held-to-maturity and
available-for-sale investment securities' maturity distribution and
corresponding tax-equivalent portfolio yields at December 31, 1995:
TABLE 4
INVESTMENT SECURITIES HELD-TO-MATURITY
MATURITY DISTRIBUTION AND PORTFOLIO YIELDS
(unaudited)
<TABLE>
<CAPTION>
One year One year Five years After
or less to five years to ten years ten years
------------- -------------- -------------- -------------
Book Yield Book Yield Book Yield Book Yield
Value (%) Value (%) Value (%) Value (%)
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities $ 415 5.74 $ -- -- $ -- -- $ -- --
----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- -----
</TABLE>
16
<PAGE>
TABLE 5
INVESTMENT SECURITIES AVAILABLE-FOR-SALE
MATURITY DISTRIBUTION AND PORTFOLIO YIELDS
(unaudited)
<TABLE>
<CAPTION>
One year One year Five years After
or less to five years to ten years ten years
---------------- --------------- -------------- --------------
Book Yield Book Yield Book Yield Book Yield
Value (%) Value (%) Value (%) Value (%)
------ ----- ------- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities $ 191 5.33 $ 7,011 4.83 $ -- -- $ -- --
U.S. Agency Securities 3,983 5.48 10,996 5.20 2,955 6.10 -- --
States and political subdivisions 389 11.95 545 1.85 704 10.51 198 10.97
Other securities -- -- -- -- -- -- 2,081 6.65
------ ----- ------- ----- ------ ----- ------ -----
Total $4,563 6.03 $18,552 4.96 $3,659 6.95 $2,279 6.95
------ ----- ------- ----- ------ ----- ------ -----
------ ----- ------- ----- ------ ----- ------ -----
<CAPTION>
Book Yield
Value (%)
------- -----
<S> <C> <C>
Collateralized mortgage
obligations and other
mortgage-backed securities $37,383 6.45
------- -----
------- -----
</TABLE>
Of the $37,383 of collateralized mortgage obligations and other
mortgage-backed securities depicted above, $37,325 were issued or guaranteed
by various U.S. Government sponsored agencies.
LIQUIDITY MANAGEMENT
A key element of the Company's FMC process is the management of
liquidity. Liquid funds are needed by the Subsidiary Banks to meet the needs
of their depositors, borrowers and for regulatory requirements. Liquid funds,
however, generally have very low earnings potential and thus careful control
of the Subsidiary Banks 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.
One component of analyzing the Company's liquidity position is through a
careful review of available funding sources. The following tables provide
information as it pertains to funding sources. Table 6 reflects a
year-to-year comparison of the sources of the Company's liability funding
based upon year-end balances.
TABLE 6
FUNDING SOURCES - YEAR-END BALANCES
(unaudited)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Demand deposits $ 32,070 $ 32,077 $ 26,288
Savings, NOW & money market deposits 97,037 110,504 109,729
Other time deposits of $100 or less 39,756 35,125 42,375
-------- -------- --------
Core deposits 168,863 177,706 178,392
Other time deposits of $100 or more 11,910 8,381 6,543
Other borrowed funds 5,230 5,756 1,202
-------- -------- --------
Total funding sources $186,003 $191,843 $186,137
-------- -------- --------
-------- -------- --------
</TABLE>
Total funding sources has remained fairly steady from December 31, 1993
through 1995; a small increased fluctuation of 3% was noted in 1994 as
compared to 1995 and 1993. As noted in the table, an increase in other time
deposits of $100 or more was noted over the past three year period. For a
review of the maturities associated to this deposit category, please see the
footnote entitled "Other Time Deposits" in the Notes to Consolidated
Financial Statements found elsewhere in this Form 10-K.
The increase of other time deposits of $100 or more is a direct result
of the slightly declining interest rates paid on money market accounts and
the improving rates on time deposits. This has resulted in a transfer of
funds between these two categories.
17
<PAGE>
Borrowing facilities are availalbe to the Subsidiary Banks through
various correspondent banks in the amount of $15,200. These lines are
established for the purpose of borrowing on an overnight basis in the form of
Federal Funds. Upon borrowing, all lines are to be secured by investment
securities. In addition, Uptown has borrowing capacity with the Federal Home
Loan Bank of Chicago in the amount of $15,840 for short and long term
borrowings. The borrowings are to be secured by qualifying 1-4 first
mortgages, private mortgage backed securities or U.S. Treasury and Agency
Obligations.
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 Banks 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 Banks maintain a capital ratio in excess of the minimum regulatory
guidelines. At December 31, 1995, all entities exceeded regulatory
established minimums as defined for "adequately capitalized" institutions.
Table 7 analyzes the Company's and Subsidiary Banks' capital ratios for
the prior three year period:
TABLE 7
CAPITAL ANALYSIS
(unaudited)
<TABLE>
<CAPTION>
Upbancorp Uptown Heritage
--------------------- --------------------- --------------------- Regulatory
1995 1994 1993 1995 1994 1993 1995 1994 1993 Requirement
----- ----- ----- ----- ----- ----- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tier I 14.2% 14.4% 14.9% 16.1% 15.0% 14.3% 8.0% 8.2% 10.0% 4.0%
Total Capital 15.3% 15.6% 16.1% 17.2% 16.3% 15.4% 9.3% 9.5% 11.2% 8.0%
Leverage 8.6% 8.5% 8.4% 8.9% 8.0% 7.7% 6.9% 7.3% 8.2% 3.0%
</TABLE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loans 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 collectibility of the loan
principle 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 Banks measure the allowance for loan losses on a
quarterly or more frequent basis using three measures of reserve adequacy.
The first measurement compares the allowance to a percentage of the total
loan portfolio. The second test measures the allowance against various loan
pools, or types, using historical and peer group reserve percentages for
expectations of possible loan losses on each category. The third is a
detailed evaluation by all loan officers of classified or non-performing
loans to ensure 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, 1995, the allowance for loan losses was comprised
of $1,222 and $180 of allocated and unallocated reserves, respectively.
18
<PAGE>
TABLE 8
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(unaudited)
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ 1,605 $ 1,421 $ 1,784
Loan charge-offs:
Commercial 403 204 781
Real estate 544 -- 431
Consumer 1 2 36
------------ ----------- -----------
Total charge-offs 948 206 1,248
Recoveries:
Commercial 25 82 87
Real estate -- 9 11
Consumer 3 8 15
------------ ----------- -----------
Total recoveries 28 99 113
Net charge-offs 920 107 1,135
Provision for loan losses 717 291 772
------------ ----------- -----------
Balance at end of year $ 1,402 $ 1,605 $ 1,421
------------ ----------- -----------
------------ ----------- -----------
Allocation of Allowance:
Commercial 846 972 962
Real estate 274 285 271
Consumer 102 99 41
Unallocated 180 249 147
------------ ----------- -----------
Balance at end of year $ 1,402 $ 1,605 $ 1,421
------------ ----------- -----------
------------ ----------- -----------
Allowance as a percentage of net loans 1.26% 1.63% 1.53%
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
As indicated by this table, the provision for loan losses amounted to
$717 for 1995 compared to $291 in 1994 and $772 in 1993. This increase in the
1995 provision is reflective of the 1995 charge-offs in addition to the
Company's loan growth.
The allowance for loan losses amounted to $1,402 for 1995 compared to
$1,605 in 1994 and $1,421 in 1993. This overall reduction is the result of
the Company's careful analysis of potential loan losses, the adequacy level
as defined by management's internal analysis, the favorable trends in
non-performing loans and the $948 in charge-offs absorbed during 1995.
NON-PERFORMING ASSETS
Non-performing assets consist of both non-accrual loans, investments and
other real estate owned. Non-accrual loans are those loans which have been
determined to have reasonable doubt as to the timely collectibility of
interest or principal. 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 which are delinquent 30 days or more
and are still accruing interest.
19
<PAGE>
The following table summarizes non-performing assets and past due loans
for the past three years as well as certain information related to interest
income on non-accrual loans during 1995:
TABLE 9
ANALYSIS OF NON-PERFORMING ASSETS AND PAST DUE LOANS
(unaudited)
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Non-accrual loans $ 2,369 $ 3,637 $ 3,135
Restructured loans 1,430 312 792
------------ ----------- -----------
Total non-performing loans $ 3,799 3,949 3,927
Non-performing securities, at market 134 -- --
Other real estate owned 1,343 335 1,497
------------ ----------- -----------
Total non-performing assets $ 5,276 $ 4,284 $ 5,424
------------ ----------- -----------
------------ ----------- -----------
Percentage of non-performing loans/loans,
net of unearned discount 3.42% 4.01% 4.24%
Percentage of non-performing assets/total
assets 2.56% 2.04% 2.64%
Past due loans $ 592 $ 3,933 $ 2,646
Percentage of total net loans .53% 3.99% 2.85%
Percentage of total assets .29% 1.87% 1.29%
Interest income not recognized due to
non-accrual status of loans $ 419 $ 309 $ 305
</TABLE>
Non-performing loans decreased to $3,799 at year-end 1995 from $3,949 at
year-end 1994 while total non-performing assets increased to $5,276 from
$4,284 in 1994. This increase is a direct result of OREO which increased
$1,008 at year-end 1995 to $1,343 from $335 in 1994.
A large percentage of the increase in 1995 is a result of the transfer
into OREO of one property with a loan balance of $844 in December, 1995. This
property is a 10 unit condominium complex; which subsequent to December 31,
1995, four units had sold and contracts have been written on four of the
remaining units. The balance has been reduced by $530 as of February 23,
1996. All subsequent information, such as appraisals, contracts, etc., have
indicated a complete recovery and reduction of this OREO balance within the
next several months.
Absent the property discussed above, the total non-performing asset
balance experienced only a slight, $148, increase over year-end 1994. The
majority of this was the classification of two securities to non-performing.
As Table 9 indicates, in addition to the improving percentages in
non-performing loans, past due loans have dramatically improved. A reduction
of $3,341 was noted in this category, from $3,933 at December 31, 1994 to
$592 at December 31, 1995. The December 31, 1995 numbers represents .53% of
total net loans, an 87% improvement as a percentage of total net loans from
the prior year-end.
NON-INTEREST INCOME
Non-interest income increased 11% in 1995 compared to 1994. The
continued improvement in non-interest income reflects the continued
diversification of our sources of revenue. The following table analyzes the
various sources of non-interest income for the years ended December 31, 1993
through 1995.
20
<PAGE>
TABLE 10
NON-INTEREST INCOME COMPONENTS
(unaudited)
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Service charges on deposit accounts $ 1,131 $ 1,121 $ 1,114
Mortgage banking fees 402 -- --
Net securities gains (losses) (86) 73 304
Other service charge income 371 352 439
Other income 164 244 --
------------ ----------- -----------
Total $ 1,982 $ 1,790 $ 1,857
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
Service charges on deposit accounts, the largest component of
non-interest income, consists of fees on both interest bearing and
non-interest bearing deposit accounts and charges for items such as
insufficient funds, overdrafts and stop payment requests. Although deposit
balances slightly decreased in 1995, revenue produced as a result of service
charge income increased slightly. This is a result of careful monitoring and
analysis of all depository accounts to ensure maximum recognition of all
potential service charges.
The addition of our mortgage banking activities at Heritage has produced
revenues from the sale of mortgage loans into the secondary market. Income
from mortgage loans sold in the secondary market was a significant
contributor to the Bank's core earnings performance and does not affect the
Bank's capital levels. It also does not create intangible assets on our
balance sheet with respect to loans originated for sale as we do not
participate in servicing or acquiring servicing rights. Mortgage banking fee
income of $402 was recognized in 1995 along with interest income of $46.
Net investment securities gains (losses) result from the sale of
securities from the investment portfolio netted with valuation allowances
established on securities which have experienced any type of market value
deterioration. For a review of gains and losses related to the investment
portfolio, please see the footnote entitled "Investment Securities" in the
Notes to Consolidated Financial Statements found elsewhere in this Form 10-K.
NON-INTEREST EXPENSE
Total non-interest expense increased 1.10% in 1995 compared to 1994, and
increased 9.62% in 1994 over the level reported in 1993. This is reflective
of the incremental increase in salaries and benefits which result from the
necessary staffing enhancements due to the growth experienced both on and off
the balance sheet. Off balance sheet increases are a result of the sale of
mortgage loans as well as the participation of various commercial loans to
other banking institutions, which is not carried within the balance sheet
asset amounts. The Company's efficiency ratio continues to improve; for the
year-ended December 31, 1995, the Company had an 80% efficiency ratio as
compared to 88% for the prior year's period, a 9% improvement. The following
table analyzes the various components of non-interest expense for the years
ended December 31, 1993 through 1995.
21
<PAGE>
TABLE 11
NON-INTEREST EXPENSE COMPONENTS
(unaudited)
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Salaries and employee benefits:
Core bank employees $ 4,524 $ 4,516 $ 3,835
Mortgage lending group 374 -- --
------------ ----------- -----------
Total 4,898 4,516 3,835
------------ ----------- -----------
Occupancy expense, net 982 1,056 1,023
Equipment expense 742 796 673
Professional services expense 411 387 311
Advertising and business
development expense 324 272 411
Supplies expense 225 224 150
Data processing expense 214 241 465
FDIC insurance premiums 239 420 412
Other expense 1,516 1,535 1,338
------------ ----------- -----------
Total non-interest expense $ 9,551 $ 9,447 $ 8,618
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
Salaries and benefits for the core employees have experienced relatively
stable trends between 1994 and 1995. These core employees deliver all
services except mortgage banking. Mortgage banking activities, where loans
are sold into the secondary market, contributed to interest and fee income of
the Subsidiary Banks of $448 in 1995; this is a result of closing on average
$3 million per month in mortgage loans during 1995.
A slight decline of $278 was recognized in non-interest expense not
related to salaries and employee benefits from $4,931 at December 31, 1994 to
$4,653 at December 31, 1995. 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.
INCOME TAXES
Upbancorp's provision for income taxes includes both federal and state
corporate income tax expense. An analysis of the provision for income taxes
and the effective income tax rates for the periods 1993 through 1995 are
detailed in Table 12.
TABLE 12
ANALYSIS OF INCOME TAX EXPENSE
(unaudited)
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Income before income tax expense $1,643 $1,052 $ 647
Income tax expense 625 246 127
Effective income tax rate 38.04% 23.38% 19.63%
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
The effective income tax rate for 1995 was 38% representing a 63%
increase over 1994. The increase was due to an increase in state income
taxes, the Company became a payor of Arizona income tax during 1995 as well
as lower levels of income from Federal and state tax-exempt securities.
22
<PAGE>
The Company continues to plan and review for potential savings as a result
of effective tax planning and strategies for both short term and long term
periods.
QUARTERLY ANALYSIS
(unaudited)
The following table analyzes the Company's quarterly earnings performance
for 1995 and 1994:
<TABLE>
<CAPTION>
1995 Quarters 1994 Quarters
------------------------------------------------- -------------------------------------------------
Fourth Third Second First Fourth Third Second First
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Interest income $ 3,939 $ 3,852 $ 3,803 $ 3,718 $ 3,730 $ 3,549 $ 3,370 $ 3,235
Interest expense 1,307 1,398 1,376 1,302 1,257 1,243 1,179 1,205
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income 2,632 2,454 2,427 2,416 2,473 2,306 2,191 2,030
Provision for loan losses 195 120 179 223 126 65 40 60
Other income 566 531 498 387 509 402 271 608
Other expense 2,293 2,423 2,527 2,308 2,706 2,265 2,133 2,343
Income before income taxes 710 442 219 272 150 378 289 235
Applicable income taxes 376 132 41 76 54 109 64 19
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income $ 334 $ 310 $ 178 $ 196 $ 96 $ 269 $ 225 $ 216
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
PER SHARE:
Net income $ 1.51 $ 1.40 $ 0.80 $ 0.88 $ 0.43 $ 1.21 $ 1.02 $ 0.97
Dividend declared 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50
Book value 83.04 82.57 81.27 79.46 78.00 79.84 79.89 81.43
Market price $ 60.00 $ 60.00 $ 60.25 $ 57.50 $ 57.50 $ 57.50 $ 57.00 $ 55.00
RATIOS:
Return on average assets .64% .59% .34% .38% .18% .51% .44% .42%
Return on average
shareholders' equity 7.13% 6.72% 3.88% 4.29% 2.10% 5.92% 5.00% 4.82%
</TABLE>
The Company's net income and per share net income for the third and fourth
quarters of 1995 totaled $310 or $1.40 and $334 or $1.51, respectively. This is
compared to net income and per share earnings for the first and second quarters
of $196 or $ .88 and $178 or $ .80, respectively. This increase is primarily the
result of a reduction in FDIC insurance premium assessments and a resulting
rebate for a four month period. Rebates of approximately $110 were received in
September by the Subsidiary Banks and a resulting reduction of approximately $27
per month was recognized during the remainder of 1995.
The Company became an Arizona income tax payor in the third quarter of 1995
thereby resulting in increased applicable income taxes during these two
quarters.
The fourth quarter 1994 net income and per share net income totaled $96 or
$ .43, respectively. These lower operating results arose primarily from an
increase in other expense, which was attributable to several non-recurring
operational expenses.
23
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
UPBANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31, (DOLLARS IN THOUSANDS) 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,356 $ 12,088
Federal funds sold 8,100 9,005
Securities available-for-sale, at estimated market value 65,804 37,140
Securities held-to-maturity, at amortized cost
(MARKET VALUES OF $417 AND $40,558 IN 1995 AND 1994, RESPECTIVELY) 415 43,707
Mortgages held-for-sale 2,949 0
Loans, net of unearned discount 111,208 98,518
Allowance for loan losses (1,402) (1,605)
------------ ------------
Loans, net 109,806 96,913
Premises, furniture and equipment, net 5,780 5,979
Accrued interest receivable 1,262 1,403
Other real estate owned 1,343 335
Other assets 3,526 3,664
------------ ------------
TOTAL ASSETS $ 206,341 $ 210,234
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Demand deposits (non-interest bearing) $ 32,070 $ 32,077
Savings, NOW and money market deposits 97,037 110,504
Other time deposits 51,666 43,506
------------ ------------
Total deposits 180,773 186,087
U.S. Treasury tax and loan notes 230 506
Borrowed funds 5,000 5,250
Accrued interest, taxes and other liabilities 1,904 1,075
------------ ------------
TOTAL LIABILITIES 187,907 192,918
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, $10 par value: 300,000 shares authorized;
222,000 issued and outstanding in 1995 and 1994 2,500 2,500
Capital surplus 3,000 3,000
Retained earnings 14,714 14,140
Treasury stock, at cost - 28,000 shares in 1995 and 1994 (1,394) (1,394)
Unrealized loss on securities available-for-sale, net of tax (386) (930)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 18,434 17,316
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 206,341 $ 210,234
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
24
<PAGE>
UPBANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended December 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 10,279 $ 8,881 $ 8,666
Interest on mortgages held-for-sale 46 - -
Interest on time deposits in other banks - 5 3
Interest on federal funds sold 584 367 302
Interest on investments:
Taxable 4,318 4,442 3,905
Non-taxable 85 189 416
------------ ------------ ------------
Total interest on investments 4,403 4,631 4,321
------------ ------------ ------------
Total interest income 15,312 13,884 13,292
------------ ------------ ------------
INTEREST EXPENSE
Interest on savings, NOW, and money market deposits 2,629 2,769 2,776
Interest on other time deposits 2,414 1,962 2,321
Interest on borrowed funds 340 153 15
------------ ------------ ------------
Total interest expense 5,383 4,884 5,112
------------ ------------ ------------
NET INTEREST INCOME 9,929 9,000 8,180
PROVISION FOR LOAN LOSSES 717 291 772
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,212 8,709 7,408
------------ ------------ ------------
NON-INTEREST INCOME
Service charges on deposit accounts 1,131 1,121 1,114
Mortgage banking fees 402 -- --
Other operating income 535 596 439
Net security gains (losses) (86) 73 304
------------ ------------ ------------
Total non-interest income 1,982 1,790 1,857
------------ ------------ ------------
NON-INTEREST EXPENSE
Salaries and employee benefits 4,898 4,516 3,835
Net occupancy expense 982 1,056 1,023
Equipment expense 742 796 673
Outside fees and services 650 807 723
Advertising and business development expenses 324 272 411
Supplies expense 225 224 150
Data processing expense 214 241 465
Other operating expense 1,516 1,535 1,338
------------ ------------ ------------
Total non-interest expense 9,551 9,447 8,618
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,643 1,052 647
Income tax provision 625 246 127
NET INCOME BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE 1,018 806 520
Cumulative effect of a change in accounting principle for income taxes -- -- 183
------------ ------------ ------------
NET INCOME $ 1,018 $ 806 $ 703
------------ ------------ ------------
------------ ------------ ------------
Net income before cumulative effect of a change in
accounting principle per share $ 4.59 $ 3.63 $ 2.32
Cumulative effect of a change in accounting principle
for income taxes per share -- -- 0.82
------------ ------------ ------------
Net income per share $ 4.59 $ 3.63 $ 3.14
------------ ------------ ------------
------------ ------------ ------------
Average shares outstanding used to compute net income per share 222,000 222,000 224,010
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
25
<PAGE>
UPBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years ended December 31, (DOLLARS IN THOUSANDS) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,018 $ 806 $ 703
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 717 291 772
Depreciation and amortization 1,061 1,031 1,078
Net (gains) losses on sales of investments available-for-sale 5 (249) (304)
Benefit of (provision for) deferred income taxes 45 (62) (197)
Amortization and accretion of securities and unearned income (201) (156) (169)
Increase (decrease) in accrued taxes payable 576 100 (366)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable 141 (69) (39)
(Increase) decrease in other real estate owned and other assets (1,318) 1,477 (2,141)
Increase (decrease) in accrued interest payable 154 (59) (75)
Increase (decrease) in other liabilities 97 (380) 65
----------- ----------- -----------
Net cash provided by (used in) operating activities 2,295 2,730 (673)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of time deposits in other banks -- (200) (400)
Proceeds from sales or maturities of time deposits in other banks -- 400 200
Net (increase) decrease in Federal funds sold 905 (2,487) 5,182
Purchases of investments available-for-sale (4,857) (19,088) (31,294)
Proceeds from maturities and redemptions
of investments available-for-sale 7,022 4,080 9,874
Proceeds from sales of investments available-for-sale 6,983 23,577 11,035
Purchases of investment securities held-to-maturity (1,559) (36,142) (30,085)
Proceeds from maturities and
redemptions of investment securities held-to-maturity 8,059 31,901 20,009
Purchases of loans (221) (277) (290)
Sales of loans 37,557 3,004 5,478
Net other (increase) decrease in loans (53,907) (8,623) 8,669
Purchases of premises and equipment (725) (708) (1,019)
----------- ----------- -----------
Net cash used in investing activities (743) (4,563) (2,641)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in total deposits (5,314) 1,152 5,435
Net increase (decrease) in other borrowed funds (526) 4,554 103
Cash dividends paid (444) (444) (448)
Purchase of treasury stock -- -- (119)
----------- ----------- -----------
Net cash provided by (used in) financing activities (6,284) 5,262 4,971
----------- ----------- -----------
Net increase (decrease) in cash and due from banks (4,732) 3,429 1,657
Cash and due from banks at beginning of year 12,088 8,659 7,002
----------- ----------- -----------
Cash and due from banks at end of year $ 7,356 $ 12,088 $ 8,659
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid in the year for:
Interest $ 5,228 $ 4,944 $ 5,187
Income Taxes 166 420 525
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
26
<PAGE>
UPBANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on Securities
Common Undivided Treasury Available-for-
Stock Surplus Profits Stock Sale, net of tax Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992 $ 2,500 $ 3,000 $ 13,523 $ (1,275) $ -- $ 17,748
Net income for the year 703 703
Cash dividends: $2.00 per common share (448) (448)
Purchase of treasury stock, at cost (119) (119)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1993 2,500 3,000 13,778 (1,394) 17,884
Net income for the year 806 806
Cash dividends: $2.00 per common share (444) (444)
Unrealized loss on
securities available-for-sale (930) (930)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1994 2,500 3,000 14,140 (1,394) (930) 17,316
Net income for the year 1,018 1,018
Cash dividends: $2.00 per common share (444) (444)
Unrealized gain on
securities available-for-sale 544 544
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 $ 2,500 $ 3,000 $ 14,714 $ (1,394) $ (386) $ 18,434
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
UPBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. The more significant accounting
policies, not described elsewhere in the notes to consolidated financial
statements, are as follows:
PRINCIPLES OF CONSOLIDATION
Consolidated financial statements include the accounts of Upbancorp, Inc.
("Upbancorp" or the "Company"), and its subsidiaries, all of which are
wholly-owned. The subsidiaries include Uptown National Bank of Chicago
("Uptown") (including its wholly-owned subsidiaries, Uptown Safe Deposit Company
"SDC" and Broadway Clark Building Corporation "BCBC") and Heritage Bank
("Heritage"). Significant intercompany balances and transactions have been
eliminated in consolidation.
BASIS OF PRESENTATION
Certain reclassifications have been made to the 1994 and 1993 consolidated
financial statements to conform to the 1995 presentation. Upbancorp uses the
accrual basis of accounting for financial reporting purposes, except for
immaterial sources of income and expense which are recorded when paid or
received.
NATURE OF BUSINESS
The Company is a multi-bank holding company, organized in 1983 under the
laws of the State of Delaware. The Company owns all of the outstanding common
stock of Uptown, organized in 1929 and located in Chicago, Illinois and
Heritage, organized in 1977 and located in Phoenix, Arizona. Upbancorp does
27
<PAGE>
not engage in any activities other than providing administrative services and
acting as a holding company for its subsidiary banks.
The Company's affiliates consist of two full-service community banks, which
operate five banking offices in northern Chicago and metropolitan Phoenix. Both
Subsidiary Banks are engaged in the general commercial banking business in
addition to offering a complete range of retail banking services. The Subsidiary
Banks conduct 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; collections; safe deposit box operations; and
other banking services tailored for both commercial and retail clients.
Uptown's two wholly-owned subsidiaries, BCBC and SDC, are Illinois
corporations. SDC rents vault space and safe deposit boxes to Uptown and the
general public. BCBC owns all of the real estate that is used in connection with
the operation of Uptown's business with the exception of one facility.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates affect the reported amounts of assets, liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements. In addition, they affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and amounts due from banks.
INVESTMENT SECURITIES
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", which the Company adopted
effective January 1, 1994. SFAS No. 115 expands the use of fair value accounting
for certain investments, but retains the use of the amortized cost method for
investments the reporting enterprise has the intent and ability to hold to
maturity. Under SFAS No. 115, investment securities are classified as
held-to-maturity, available-for-sale or trading.
In the fourth quarter of 1995, concurrent with the adoption of its
implementation guide on SFAS No. 115, FASB allowed a one-time reassessment of
the SFAS No. 115 classifications of all securities currently held. Any
reclassifications would be accounted for at fair value in accordance with SFAS
No. 115 and any reclassifications from the held-to-maturity portfolio that
resulted from this one-time reassessment would not call into question the
intent of the Company to hold other debt securities to maturity in the future.
The Company used the opportunity under this one- time reassessment to reclassify
$36,731 of investment securities from held-to-maturity to the available-for-sale
portfolio. In connection with this reclassification, gross unrealized gains of
$130 and gross unrealized losses of $558 were recorded in available-for-sale
securities and in shareholders' equity (on a net-of-tax basis). At December 28,
1995, the majority of the Company's investments were reclassified to the
available-for-sale portfolio.
The available-for-sale portfolio is carried at fair market value with
unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity. Prior to the adoption of SAFS No. 115, securities
available-for-sale were carried at the lower of amortized cost or market value
on an aggregate basis. These available-for-sale securities are those which
management believes could be sold prior to maturity in order to manage interest
rate risk, prepayment or liquidity risk.
The held-to-maturity portfolio is recorded at cost adjusted for
amortization of premium and accretion of discount in accordance with
management's positive intent and ability to hold these securities to final
maturity. Premium and discount on held-to-maturity securities are amortized
(deducted) and accreted (added), respectively, to interest income using the
level yield method over the period from acquisition to maturity, or earlier call
date, of the related securities.
28
<PAGE>
MORTGAGES HELD-FOR-SALE
The Company routinely sells to investors its originated residential
mortgage loans and retains no servicing rights relating to these mortgages sold.
Mortgage activity includes both mortgages held-for-sale which are recorded on
the Company's books for a period of 5-10 days, all with pre-purchase
agreements, in addition to loans sold directly into the secondary market.
Mortgages held-for-sale are carried at cost for a period of up to ten days with
interest income recognized for that period. Mortgage banking fees are recorded
at the date of purchase. For purposes of this report, mortgages held-for-sale
and mortgage banking fees relate only to these two types of mortgage activities;
not to mortgages which are originated, booked and serviced by the Company.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are carried at the principal amount outstanding, net of unearned
income, including certain deferred loan fees. Unearned discounts on certain
loans are credited to income over the term of the loan using the sum-of-month's
digits method which approximates the level yield method. Interest income on
loans is accrued based on principal amounts outstanding. Non-refundable loan
origination and commitment fees, and incremental direct costs, are deferred and
amortized to income on a straight-line basis over the contractual life of the
loan.
It is the Company's policy to discontinue the accrual of interest income on
any loan when, in the opinion of management, there is reasonable doubt as to the
ultimate collection of interest or principal. Non-accrual loans are returned to
an accrual status when, in the opinion of management, the financial position of
the borrower and other relevant factors indicate there is no longer any
reasonable doubt as to the timely payment of principal or interest.
The allowance for loan losses includes management's estimate of the amounts
expected to be lost on specific loans and for losses on other as of yet
unidentified loans included in loans receivable at December 31, 1995. In
estimating the potential losses on specific loans, management relies on a
combination of in-house prepared discounted cash flow analyses and valuations by
independent appraisers. In estimating the reserve component for unidentified
losses within the portfolio, management relies on historical experience by loan
type adjusted for any known trends in the portfolio. The amounts the Company
will ultimately realize could differ materially in the near term from the
amounts assumed in arriving at the allowance for possible loan losses reported
in the financial statements at December 31, 1995.
In May 1993, FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." This new statement requires that a creditor measures
impairment of a loan based upon the present value of expected future cash flows,
or if the loan is collateral dependent, the fair value of the underlying
collateral. In October, 1994, SFAS No. 114 was amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures", to allow a creditor to use existing methods to recognize interest
income on impaired loans. Both statements are effective for fiscal years
beginning after December 15, 1994. As required, Upbancorp adopted these new
standards January 1, 1995. Management believes the adoption of these statements
did not have a material effect on the consolidated financial statements.
PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed principally on the straight-line method
over the estimated useful lives of the assets which range between three and
thirty years. Maintenance and repairs are charged to expense when incurred;
improvements are capitalized. Gains and losses on routine disposition, which are
not significant, are reflected in current operations.
OTHER REAL ESTATE OWNED
Other real estate owned consists of properties acquired in partial or total
satisfaction of debt and 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. Losses arising at acquisition are charged
against the allowance for loan losses. Write-downs to reflect reductions in fair
value subsequent to acquisition are recorded in other expense in the
consolidated statements of income, while any gains which are realized on the
disposition of such properties are included in other income. Other real estate
owned included in other assets at December 31, 1995 and 1994 is approximately
$1,343 and $335, respectively.
29
<PAGE>
GOODWILL
Goodwill arising from the acquisition of Heritage Bank is being amortized
on a straight line basis through 2002, in addition to direct reductions allowed
through net operating loss credits utilization. As of December 31, 1995 and
1994, goodwill of $318 and $455, net of accumulated amortization, is included in
other assets in the consolidated statement of condition.
INCOME TAXES
In February, 1992, FASB issued SFAS No. 109, "Accounting for Income Taxes".
Under the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. To the extent that current
available evidence about the future raises doubt about the realization of a
deferred tax asset, a valuation allowance must be established. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
2. INVESTMENT SECURITIES
The U. S. Treasury securities outstanding at December 31, 1995 are due on
or before December 31, 1996. The amortized cost and estimated market value of
HELD-TO-MATURITY securities are as follows at December 31:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------------------------------- ---------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
--------- ------- ------- ------ -------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 415 $ 2 $ -- $ 417 $ 7,626 $ -- $ 683 $ 6,943
U.S. Government agencies -- -- -- -- 12,991 -- 849 12,142
States and political
subdivisions -- -- -- -- 869 -- 403 466
Mortgage-backed securities -- -- -- -- 20,894 18 1,217 19,695
Other debt securities -- -- -- -- 1,327 -- 15 1,312
--------- ------ ------ ------ -------- ----- ------- -------
Total investment securities $ 415 $ 2 $ -- $ 417 $ 43,707 $ 18 $ 3,167 $40,558
--------- ------ ------ ------ -------- ----- ------- -------
--------- ------ ------ ------ -------- ----- ------- -------
</TABLE>
The amortized cost and estimated market value of securities
AVAILABLE-FOR-SALE are as follows at December 31:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
----------------------------------------------- ---------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 7,202 $ -- $ 71 $ 7,131 $ 1,996 $ -- $ 90 $ 1,906
U.S. Government agencies 17,934 3 94 17,843 11,889 -- 177 11,712
States and political
subdivisions 1,836 105 318 1,623 1,177 40 -- 1,217
Mortgage-backed securities 37,383 294 546 37,131 22,657 31 1,328 21,360
Other debt securities 2,081 -- 5 2,076 945 -- -- 945
--------- ------ ------- --------- -------- ------ ------- --------
Total investment securities $ 66,436 $ 402 $ 1,034 $ 65,804 $ 38,664 $ 71 $ 1,595 $ 37,140
--------- ------ ------- --------- -------- ------ ------- --------
--------- ------ ------- --------- -------- ------ ------- --------
</TABLE>
30
<PAGE>
The amortized cost and estimated market value of AVAILABLE-FOR-SALE
securities at December 31, 1995, by contractual maturity, are shown in the
following table:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
---------- ----------
<S> <C> <C>
Due in one year or less $ 4,562 $ 4,569
Due after one year through five years 18,553 18,075
Due after five years through ten years 4,783 4,848
Due after ten years 1,155 1,181
Mortgage-backed securities 37,383 37,131
---------- ---------
Total $ 66,436 $ 65,804
---------- ---------
---------- ---------
</TABLE>
Investment securities carried at approximately $11,061 and $12,015 at
December 31, 1995 and 1994, respectively, were pledged to secure public and
trust deposits and for other purposes as required or permitted by law.
Market value of the held-to-maturity and available-for-sale portfolios is
determined by reference to quoted market prices, if available. If quoted market
prices are not available, market value is estimated using quoted market pries
for similar securities.
Included in the "States and political subdivisions" total are approximately
$710 of securities that began to experience market value deterioration in the
beginning of 1994. An allowance has been established associated to this security
totaling $257 as of December, 1995. These investments are carried at estimated
market value as securities available-for-sale on the balance sheet. The
difference between the amortized cost and the estimated market value is carried
in the unrealized losses on securities available-for-sale, net of tax, within
the balance sheet.
3. LOANS
Major classifications of loans are as follows at December 31:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Commercial and industrial $ 73,550 $ 60,696
Real Estate 28,883 26,510
Consumer 9,007 11,532
----------- -----------
111,440 98,738
Less unearned discount (232) (220)
----------- -----------
Total loans $ 111,208 $ 98,518
----------- -----------
----------- -----------
</TABLE>
Certain executive officers and directors of Upbancorp and its subsidiaries
and their affiliates have borrowed money from the Subsidiary Banks in the
ordinary course of business and in management's opinion, on substantially the
same terms as other Bank customers. Loans to such related parties approximated
$2,925 and $3,260 at December 31, 1995 and 1994, respectively. During 1995, the
Bank granted advances of $3,238 and received repayments of $3,610. All loans
were performing at December 31, 1995 in accordance with their stated terms.
Loans in a non-accrual status amounted to approximately $2,369, $3,637 and
$3,135 at December 31, 1995, 1994, and 1993, respectively. If interest on
non-accrual loans had been accrued, such income would have approximated $419,
$309 and $305 in 1995, 1994, and 1993, respectively. The amount of interest
income received on these loans was $77 in 1995, $120 in 1994 and $69 in 1993.
31
<PAGE>
Transactions in the allowance for loan losses account during the years
ended December 31, 1995, 1994, and 1993 are summarized below:
<TABLE>
<CAPTION>
December 31,
------------------------------
1995 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year $ 1,605 $ 1,421 $ 1,784
Provision for loan losses 717 291 772
Loans charged-off (948) (206) (1,248)
Recoveries on loans previously charged-off 28 99 113
----------- --------- ---------
Balance at end of year $ 1,402 $ 1,605 $ 1,421
----------- -------- ---------
----------- -------- ---------
</TABLE>
As of December 31, 1995, the Company's recorded investment in impaired
loans and the related valuation allowance calculated under SFAS No. 114 and No.
118 are as follows:
<TABLE>
<CAPTION>
Carrying Valuation
Value Allowance
--------- ---------
<S> <C> <C>
Impaired loans
Valuation allowance required $ 1,581 $ 261
No valuation allowance required 788 --
--------- --------
Total Impaired Loans $ 2,369 $ 261
--------- --------
--------- --------
</TABLE>
The valuation allowance is included in the allowance for loan losses on the
balance sheet. The average recorded investment in impaired loans for year-ended
December 31, 1995, was $197. Payments received on impaired loans are recorded as
reductions of principal.
4. PREMISES, FURNITURE AND EQUIPMENT
The following is a summary of bank premises and equipment at December 31:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Land $ 1,106 $ 1,106
Buildings and improvements 10,852 10,612
Furniture, fixtures and equipment 5,751 5,307
---------- ---------
Total cost 17,709 17,025
Accumulated depreciation (11,929) (11,046)
---------- ---------
Net book value $ 5,780 $ 5,979
---------- ---------
---------- ---------
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1994, and 1993
amounted to approximately $924, $972 and $1,010, respectively.
The buildings, in which the main facilities of each bank are located, have
stores and offices which are rented. Gross rental receipts were $908 in 1995,
$858 in 1994 and $820 in 1993 and are recorded as a reduction of net occupancy
expense.
32
<PAGE>
5. OTHER TIME DEPOSITS
Maturities of time certificates of deposit of $100 or more are summarized
as follows at December 31:
<TABLE>
<CAPTION>
1995 1994
------------- ------------
<S> <C> <C>
Three months or less $ 4,311 $ 2,444
Over three through six months 3,232 1,171
Over six through twelve months 1,784 799
Over twelve months 2,583 3,967
------------- ------------
Total $ 11,910 $ 8,381
------------- ------------
------------- ------------
</TABLE>
6. SHORT-TERM BORROWINGS
Uptown National Bank established an Advances and Security Agreement with
the Federal Home Loan Bank of Chicago in 1994. 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 $15,840. As required under the
agreement, the advances can be collateralized by the following: qualifying 1-4
first mortgages, private mortgage-backed securities or U.S. Treasury and Agency
Obligations. Uptown has pledged a combination of U.S. Treasury and
mortgage-backed securities.
At December 31, 1995, an outstanding advance under the agreement consisted
of $5 million in a variable rate advance at LIBOR plus 5 Basis Points; this
principal is due in 1996. During 1995, this borrowing had an average, a high and
a low balance of $5 million.
7. INCOME TAXES
The provision for income taxes for the years ended December 31,1995 and
1994 is comprised of the following amounts:
<TABLE>
<CAPTION>
1995 1994
-------------- -------------
<S> <C> <C>
Current:
Federal $ 499 $ 307
State 81 --
Deferred:
Federal 70 (40)
State (25) (21)
-------------- -------------
Total tax provision $ 625 $ 246
-------------- -------------
-------------- -------------
</TABLE>
33
<PAGE>
The Bank has recorded a net deferred tax asset of $887 and $1,279 as of
December 31, 1995 and 1994, respectively, which is included in the balance sheet
line item entitled "Other Assets." The components of the net deferred tax
assets are as follows:
<TABLE>
<CAPTION>
1995 1994
-------------- -------------
<S> <C> <C>
Deferred Tax Assets
Alternative minimum tax carryforward $ 418 $ 418
Rehabilitation and investment tax credits -- 155
Allowance for loan losses and OREO 304 273
Depreciation 285 211
Interest on non-accrual loans 295 214
Deferred loan fees 79 79
Securities Available-for-Sale adjustment 247 594
-------------- -------------
Gross Deferred Tax Assets 1,628 1,944
Valuation allowance -- (3)
-------------- -------------
Gross Deferred Tax Assets, Net of
Valuation Allowance 1,628 1,941
Deferred Tax Liabilities
Pension expense 581 529
Discount accretion 148 127
Other 12 6
-------------- -------------
Gross Deferred Tax Liabilities 741 662
-------------- -------------
Net Deferred Tax Assets $ 887 $ 1,279
-------------- -------------
-------------- -------------
</TABLE>
The net deferred tax assets are included in other assets. Management has
determined that a valuation allowance is not required at December 31, 1995.
The following table reconciles the statutory Federal income tax rate with
the effective income tax as a percent of pretax income.
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Statutory income tax rate 34.0% 34.0% 34.0%
Reduction/increase in taxes
resulting from
Tax-exempt interest -1.7% -6.3% -21.8%
State tax 2.2% -1.3% -2.9%
Other - net 3.5% -3.0% 10.3%
-------- -------- --------
Effective income tax rate 38.0% 23.4% 19.6%
-------- -------- --------
-------- -------- --------
</TABLE>
In prior years, the Company was subject to the Alternative Minimum Tax
(AMT). An AMT credit is created for the excess of AMT paid over the regular tax.
This credit, which does not expire, is available to reduce tax liabilities in
future years to the extent future years' regular tax exceeds the AMT. At
December 31, 1995, the Company had an AMT credit carryforward of approximately
$418 for federal income tax purposes.
34
<PAGE>
8. PENSION PLAN
The following table sets forth the Pension Plan's funded status for the
periods noted:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994
----------- ------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $2,793 and $2,813 for 1995 and 1994, respectively $ 3,977 $ 3,328
----------- ------------
----------- ------------
Projected benefit obligation for service rendered to date $ (4,471) $ (3,695)
Plan assets at fair value 5,792 5,156
----------- ------------
Plan assets in excess of projected benefit obligations 1,321 1,461
Unrecognized prior service costs (154) (173)
Unrecognized net loss 558 446
Unrecognized net asset (established January 1, 1987) (319) (452)
----------- ------------
Prepaid pension cost included in other assets $ 1,406 $ 1,282
----------- ------------
----------- ------------
Net pension cost (benefit) included the following components:
Service cost-benefits earned during the period $ 144 $ 132
Interest cost on projected benefit obligation 311 269
Actual return on plan assets (876) (147)
Net amortization and deferral 297 (439)
----------- ------------
Net periodic pension cost (benefit) $ (124) $ (185)
----------- ------------
----------- ------------
Weighted average discount rate 7.0% 8.5%
Rate of increase in future compensation levels 4.5% 5.5%
Expected long-term rate of return on assets 8.5% 8.5%
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
Upbancorp leases certain office facilities and equipment under various
operating lease agreements that provide for payment of taxes, insurance and
maintenance costs. These leases generally include renewal options, with certain
leases providing purchase options. The future minimum rental commitments at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
PREMISES EQUIPMENT TOTAL
-------- ----------- ---------
<S> <C> <C> <C>
1996 $ 139 $ 166 $ 305
1997 144 80 224
1998 145 -- 145
1999 147 -- 147
2000 149 -- 149
Thereafter 368 -- 368
-------- ----------- ---------
Total minimum payments $ 1,092 $ 246 $ 1,338
-------- ----------- ---------
-------- ----------- ---------
</TABLE>
The Company is a party to several routine legal proceedings encountered as
the result of normal business transactions. Management believes, after
consultation with counsel, that these proceedings will not have a material
impact on the Company's results of operations or financial position.
35
<PAGE>
10. STATUTORY/REGULATORY RESTRICTIONS
The Company's Subsidiary Banks are required by the Federal Reserve Act to
maintain reserves against their deposits. Reserves are held either in the form
of vault cash or balances maintained directly with the Federal Reserve Bank.
Required reserves are a function of daily average deposit balances and statutory
reserve ratios prescribed by type of deposit. At December 31, 1995, a reserve
balance of approximately $1,892 was required of the Company's Subsidiary Banks.
The approval of the Office of the Comptroller of the Currency (OCC) is
necessary before Uptown Bank's dividend during any year can exceed the total of
Uptown Bank's net profits (as defined) for the current year combined with
retained net profits of the preceding two years. As of December 31, 1995, Uptown
may distribute dividends of approximately $91 without prior approval from the
OCC.
In June, 1992, at the request of the Federal Reserve Bank of Chicago
("Reserve Bank"), the Company's Directors adopted a resolution that requires
the Company to notify the Reserve Bank in writing 30 days prior to the
declaration of dividends, and obtain prior written approval of the Reserve
Bank before incurring debt. Management believes that the Company has been in
compliance with all the provisions of the resolution, which may not be
amended or rescinded without the prior approval of the Reserve Bank.
The Company is not subject to any other specific regulations that restrict
dividend payments.
11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Subsidiary Banks are parties to financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized
in the balance sheet. The contract amounts of these instruments reflect the
extent of involvement a bank has in particular classes of financial
instruments.
The Banks' exposure to credit loss in the event of nonperformance by the
other party for commitments to extend credit and standby and commercial
letters of credit is presented by the contractual amount of those
instruments. The Banks use the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
<TABLE>
<CAPTION>
Financial instruments whose contract
amounts represent credit risk:
Contract Amount
-------------------------
1995 1994
----------- -----------
<S> <C> <C>
Commitments to extend credit $ 33,589 $ 36,141
Letters of credit:
Standby 620 6
Commercial 950 1,439
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Banks evaluate each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Banks upon extension of credit is based on management's
credit evaluation of the customer. Collateral held varies but may include
accounts receivable, marketable securities, inventory, property, plant, and
equipment, and income-producing commercial properties and residential
properties.
Standby letters of credit are conditional commitments issued by the Banks
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The Banks hold various
types of collateral (primarily certificates of deposit) to support those
commitments for which collateral is deemed necessary. Most of the letters of
credit expire within twelve months.
36
<PAGE>
12. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summarizes the carrying value and estimated fair value of
financial instruments as of December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
------------------------------ ----------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks $ 7,356 $ 7,356 $ 12,088 $ 12,088
Federal fund sold 8,100 8,100 9,005 9,005
Investment securities held-
to-maturity 415 417 43,707 40,558
Investment securities available-
for-sale 65,804 65,804 37,140 37,140
Loans, net of unearned discount and
mortgages held-for-sale 112,755 112,960 96,913 96,468
Accrued interest receivable 1,262 1,262 1,403 1,403
FINANCIAL LIABILITIES
Deposits $ 180,773 $180,797 $186,087 $185,678
Other borrowed funds 5,230 5,230 5,756 5,756
Accrued interest payable 564 564 408 408
</TABLE>
Where readily available, quoted market prices were utilized by the Company.
If quoted market prices were not available, fair values were based on estimates
using present value calculations. As this method is significantly affected by
assumptions used, such as the discount rate and estimates of future cash flows,
the estimates cannot be substantiated by comparison to independent markets and,
in many cases, could not be realized upon immediate settlement of the
instruments. Certain financial instruments and all non-financial assets and
liabilities have been omitted from this disclosure requirement; accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
Upbancorp. The following methods and assumptions were used in estimating the
fair value for financial instruments.
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD
The fair values reported for cash and cash equivalents were estimated to be
their carrying value as they are highly liquid and short-term in nature.
INVESTMENT SECURITIES HELD-TO-MATURITY AND INVESTMENT
SECURITIES AVAILABLE-FOR-SALE
Fair values of securities held-to-maturity and available-for-sale are
determined by reference to quoted market prices, if available. If quoted market
prices are not available, fair value is estimated using quoted prices for
similar securities.
LOANS, NET OF UNEARNED DISCOUNT AND MORTGAGES HELD-FOR-SALE
Fair value of the loan portfolio was estimated by discounting anticipated future
cash flows using current rates at which similar loans would be made with the
same remaining maturity.
ACCRUED INTEREST RECEIVABLE
Due to its short-term nature, the fair value of accrued interest receivable
was estimated at carrying value.
37
<PAGE>
DEPOSITS
The fair value of deposits with no stated maturities is estimated to be the
carrying value. Fair value of fixed maturity certificates is estimated by
discounting future cash flows using rates currently offered for deposits of
similar remaining maturities.
OTHER BORROWED FUNDS
As these instruments are short-term in nature, their fair value is estimated to
be their carrying value.
ACCRUED INTEREST PAYABLE
Due to its short-term nature, the fair value of accrued interest payable was
estimated at carrying value.
13. 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
<TABLE>
<CAPTION>
December 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 140 $ 776
Investment in subsidiary banks 18,317 16,603
Other 100 87
--------- ---------
TOTAL ASSETS $18,557 $17,466
--------- ---------
--------- ---------
LIABILITIES
Dividend declared $ 111 $ 111
Other liabilities 12 39
--------- ---------
TOTAL LIABILITIES $ 123 $ 150
--------- ---------
SHAREHOLDERS' EQUITY
Common stock - $10 par value $ 2,500 $ 2,500
Surplus 3,000 3,000
Undivided profits 14,714 14,140
Treasury stock (1,394) (1,394)
Net unrealized loss on securities available-for-sale (386) (930)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY $ 18,434 $ 17,316
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 18,557 $ 17,466
--------- ---------
--------- ---------
</TABLE>
38
<PAGE>
13. UPBANCORP, INC. - PARENT ONLY
FINANCIAL STATEMENTS
(Continued)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended December 31, (DOLLARS IN THOUSANDS) 1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends received from
bank subsidiaries $ 125 $ 600 $ 2,370
Interest on deposits 8 12 16
Interest on U.S. Treasury Bills -- 11 26
------- ----- -------
Total Income 133 623 2,412
------- ----- -------
EXPENSE
Salaries and employee benefits 343 339 346
Other expense 35 90 111
------- ----- -------
Total Expense 378 429 457
------- ----- -------
INCOME (LOSS) BEFORE INCOME TAXES AND
UNDISTRIBUTED INCOME (LOSS) OF SUBSIDIARIES (245) 194 1,955
Income tax benefit 94 81 86
Income (loss) before undistributed income
(loss) of subsidiaries (151) 275 2,041
Undistributed income (loss) of subsidiaries 1,169 531 (1,338)
------- ----- -------
NET INCOME $ 1,018 $ 806 $ 703
------- ----- -------
------- ----- -------
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31, (DOLLARS IN THOUSANDS) 1995 1994 1993
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,018 $ 806 $ 703
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Equity in undistributed (income) loss of subsidiaries (1,169) (531) 1,338
Accretion on U.S. Treasury Bills -- (11) (26)
Other, net (41) 17 19
------- ------- -------
Net cash provided by (used in) operating activities (192) 281 2,034
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital infusion to subsidiary -- (500) (500)
Purchases of U.S. Treasury Bills -- (344) (3,319)
Maturities of U.S. Treasury Bills -- 1,450 2,250
------- ------- -------
Net cash provided by (used in) investing activities -- 606 (1,569)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (444) (444) (448)
Treasury stock purchased -- -- (119)
------- ------- -------
Net cash used in financing activities (444) (444) (567)
------- ------- -------
Net increase (decrease) in cash (636) 443 (102)
Cash at beginning of year 776 333 435
------- ------- -------
Cash at end of year $ 140 $ 776 $ 333
------- ------- -------
------- ------- -------
</TABLE>
39
<PAGE>
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 and are free from material fraud and error.
Management depends upon the Company's system of internal controls in
meeting its responsibilities for reliable financial statements. This system is
designed to provide reasonable assurance that assets are safeguarded and that
transactions are properly recorded and executed in accordance with management's
authorization. Judgments are required to assess and balance the relative cost
and the expected benefits of these controls. As an integral part of the system
of internal controls, the Bank Subsidiaries contract with a professional staff
of Independent Internal Auditors who conduct operational, financial, and special
audits, and coordinate audit coverage.
The consolidated financial statements have been audited by our
Independent Public Accountants, Arthur Andersen LLP, who render an independent
professional opinion on Management's financial statements.
The Audit Committee of Upbancorp, Inc.'s Board of Directors, which is
composed solely of outside directors, meets regularly with the Independent
Public Accountants, Independent Internal 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 Public Accountants and Independent Internal
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.
Management also recognizes its responsibility for fostering a strong
ethical climate so that its affairs are conducted according to the highest
standards of personal and corporate conduct. This responsibility is
characterized and reflected in the Company's code of ethical business practices
policy, which is publicized throughout the Company. The policy addresses, among
other things, the necessity of ensuring open communication within the Company;
potential conflicts of interest; compliance with all domestic and foreign laws,
including those relating to financial disclosure; and the confidentiality of
proprietary information. The Company maintains a systematic program to assess
compliance with these policies.
Sincerely,
/s/ Richard K. Ostrom
Richard K. Ostrom
President and Chief Executive Officer
/s/ Kathleen L. Harris
Kathleen L. Harris
Vice President & Chief Financial Officer
40
<PAGE>
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. (a Delaware corporation) and subsidiaries as of December 31,
1995 and 1994, 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, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Upbancorp, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois
February 23, 1996
41
<PAGE>
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 1996 Annual Meeting of Shareholders of
the Company to be held on April 16, 1996, 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 1996 Annual Meeting of Shareholders of the Company to be held
on April 16, 1996, 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 1996 Annual
Meeting of Shareholders of the Company to be held on April 16, 1996, 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 1996 Annual Meeting of Shareholders of
the Company to be held on April 16, 1996, 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 3 to the Consolidated
Financial Statements located elsewhere in this Form 10-K.
42
<PAGE>
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, 1995 and
1994
Consolidated Statements of Income - Years ended December 31,
1995, 1994, and 1993
Consolidated Statements of Cash Flows - Years ended December 31,
1995, 1994 and 1993
Consolidated Statements of Changes in Shareholders' Equity -
Years ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
FINANCIAL STATEMENT SCHEDULES
All schedules normally required by Form 10-K are omitted
since they are either not applicable or the required information
is shown in the financial statements or notes thereto.
EXHIBITS
(3) By-laws as amended by the Company's Board of Directors on
December 15, 1995.
(b) REPORTS ON FORM 8-K - No reports on Form 8-K were filed during the
fourth quarter of 1995.
43
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Date: February 23, 1996 UPBANCORP, INC.
---------------
(The Registrant)
/s/ Richard K. Ostrom
---------------------
Richard K. Ostrom
President and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THEIR CAPACITIES ON FEBRUARY 23, 1996.
/s/ Roger P. Eklund Chairman of the Board February 23, 1996
-----------------------------
Roger P. Eklund
/s/ Stephen W. Edwards, CLU Director February 23, 1996
-----------------------------
Stephen W. Edwards, CLU
/s/ John E. Fahrendorf, Jr. Director February 23, 1996
-----------------------------
John E. Fahrendorf, Jr.
/s/ Alfred E. Hackbarth, Jr. Director February 23, 1996
-----------------------------
Alfred E. Hackbarth, Jr.
/s/ James E. Heraty Director February 23, 1996
-----------------------------
James E. Heraty
/s/ Marvin L. Kocian Director February 23, 1996
-----------------------------
Marvin L. Kocian
/s/ Richard K. Ostrom Director February 23, 1996
-----------------------------
Richard K. Ostrom
/s/ B. Arthur Russell Director February 23, 1996
-----------------------------
B. Arthur Russell
44
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
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