<PAGE>
UPBANCORP, INC.
1998
ANNUAL REPORT
FORM 10K
<PAGE>
UPBANCORP, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
For the years ended December 31, 1998 1997 % Change
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
NET INCOME: $ 2,300 $ 1,977 16%
- --------------------------------------------------------------------------------
PER SHARE DATA:
- --------------------------------------------------------------------------------
Net income $ 2.63 $ 2.24 17%
Cash dividends declared 0.50 0.50 0%
Book value 26.02 23.79 9%
Market price 35.25 31.13 13%
PERFORMANCE RATIOS:
- --------------------------------------------------------------------------------
Return on average assets 0.91% 0.87% 4%
Return on average shareholders' equity 10.44% 9.98% 5%
BALANCE SHEET HIGHLIGHTS:
- --------------------------------------------------------------------------------
Average assets $ 253,559 $ 227,079 12%
Average loans, net of unearned discount 178,076 144,898 23%
Average deposits 213,886 198,842 8%
Average shareholders' equity 22,033 19,819 11%
- --------------------------------------------------------------------------------
</TABLE>
[Graphic Below]
<TABLE>
<CAPTION>
Net Income Non-Performing Assets
<S> <C> <C> <C>
1996 $1,154 1996 $2,580
1997 $1,977 1997 $1,482
1998 $2,300 1998 $1,309
</TABLE>
<TABLE>
<CAPTION>
Total Loans Total Deposits Total Assets
<S> <C> <C> <C> <C> <C>
1996 $129,584 1996 $195,302 1996 $226,395
1997 $164,242 1997 $198,132 1997 $231,377
1998 $192,596 1998 $226,034 1998 $269,462
</TABLE>
<PAGE>
UPBANCORP, INC.
- --------------------------------------------------------------------------------
To Our Shareholders:
On behalf of the Board of Directors, I am pleased to present the 1998 Annual
Report for Upbancorp, Inc..
In summary, we again experienced significant asset and earnings growth. Total
assets reached $269 million as of December 31, 1998, an increase of $38 million
from the previous year. Loan growth was strong, with over $195 million in loans
outstanding at year-end. In addition, a 14% growth of deposits occurred in 1998,
bringing year-end totals to $226 million. Our loan balances as a percentage of
deposits continue to improve with a 3% increase in this ratio. Such growth,
coupled with our improving asset mix, allowed the Company to recognize continued
improvement in our financial performance. Net income for the year was $2.3
million, an improvement of 16% from 1997. The Company's Return on Average Assets
was .91% and Return on Average Shareholders' Equity was 10.44%, improvements of
4% and 5%, respectively.
The Company implemented computer networks this past year in conjunction with the
conversion of our data processing systems. These efforts will ensure better
coordination of workflow between our two affiliate Banks as well as within each
respective Bank. In addition to our technological advancements, in October,
1998, Uptown National Bank purchased the assets of Zook Pilot Services, Inc., a
broker of aircraft financing. We look forward to the additional opportunities
that this acquisition provides. A new branch office was recently opened in the
Chicago area. This branch, located in the Edgewater community, is another full
service site to serve both our existing as well as new customers. Our strategic
plan calls for additional branches to open in the near term in both of our
regional areas.
While improved communications, technology, delivery systems and services were
our priorities during 1998, improving financial performance for you, our valued
shareholders, is always a primary focus. The Company's charter was changed,
effective October 20, 1998, to increase its authorized shares of common stock
from 300,000 to 3,000,000. Also, the common stock was split on a four-to-one
basis. I am pleased to announce that effective February 16, 1999, the Board of
Directors elected to increase your quarterly cash dividend to $0.13 per share.
As the year progresses, we will continue to emphasize the Company's readiness
for all potential year 2000 (Y2K) concerns. A detailed discussion of this issue
follows later in this report. However, I would like to assure you that we have
had teams mobilized for the past two years to address this issue as we approach
the new millennium. Although we cannot guarantee full Y2K compliance, we are on
track with our internal plans.
On a very sad note, the Board of Directors of Upbancorp, Inc., lost a valuable
member with the recent death of B. Arthur Russell. Mr. Russell served on the
Board since 1971. His knowledge, insight and experience was extremely valuable
to his fellow directors and the Corporation. He will be greatly missed.
During 1999 we will be celebrating our 70th year anniversary, a milestone in the
history of service, progress and achievement for the Company. Uptown National
Bank of Chicago opened its doors as Uptown State Bank on December 21, 1929.
Throughout our 70 years in business, the Bank, and later all other affiliates,
have been committed to serving our customers and meeting their needs through
providing strong and viable institutions. As we move into this historic year, I
wish to again thank our Board of Directors and staff for the many efforts and
resulting successes that we have experienced this past year, as well as the last
70 years. In addition, I want to thank you, our shareholders, for your continued
support and assure you of our ongoing commitment and focus to the continual
improvement of past successes.
Sincerely yours,
/s/ Richard K. Ostrom
- -------------------------------------
Richard K. Ostrom
Chairman of the Board
President & Chief Executive Officer
<PAGE>
<TABLE>
<S> <C> <C>
UPTOWN NATIONAL
UPBANCORP, INC. BANK OF CHICAGO HERITAGE BANK
DIRECTORS DIRECTORS DIRECTORS
RICHARD K. OSTROM RICHARD K. OSTROM RICHARD K. OSTROM
CHAIRMAN OF THE BOARD, CHAIRMAN OF THE BOARD CHAIRMAN OF THE BOARD
PRESIDENT AND CHIEF EXECUTIVE
OFFICER, UPBANCORP, INC. STEPHEN W. EDWARDS JOHN D. BENTON
PRESIDENT
STEPHEN W. EDWARDS, CLU ROBERT P. GRIFFITHS BENTON-ROBB DEVELOPMENT
PRESIDENT PRESIDENT AND ASSOCIATES
PLANNED FUTURES, INC. CHIEF EXECUTIVE OFFICER (REAL ESTATE DEVELOPMENT
AND MANAGEMENT)
DELBERT R. ELLIS ALFRED E. HACKBARTH, JR.
RETIRED DELBERT R. ELLIS
FORMER EXECUTIVE VICE PRESIDENT JAMES E. HERATY VICE CHAIRMAN OF THE BOARD
BANK OF AMERICA, ARIZONA
MARVIN L. KOCIAN JOHN E. FAHRENDORF, JR.
JOHN E. FAHRENDORF, JR. PRESIDENT AND CHIEF
VICE PRESIDENT EXECUTIVE OFFICER
UPBANCORP, INC.
ALFRED E. HACKBARTH, JR.
ROBERT P. GRIFFITHS
VICE PRESIDENT VICTOR A. ROOT
UPBANCORP, INC. PRESIDENT
VICTOR A. ROOT & ASSOCIATES
ALFRED E. HACKBARTH, JR. (CPA AND FINANCIAL CONSULTANT)
OWNER
A.E. HACKBARTH & ASSOCIATES
(ATTORNEYS & CPAS)
RETIRED PARTNER
ARTHUR ANDERSEN & CO., S.C.
JAMES E. HERATY
RETIRED
FORMER PRESIDENT
READY-MEN, INC.
MARVIN L. KOCIAN
PRESIDENT
KOMAR SCREW CORPORATION
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
UPTOWN NATIONAL
UPBANCORP, INC. BANK OF CHICAGO HERITAGE BANK
OFFICERS MANAGEMENT MANAGEMENT
RICHARD K. OSTROM RICHARD K. OSTROM RICHARD K. OSTROM
CHAIRMAN OF THE BOARD, CHAIRMAN OF THE BOARD CHAIRMAN OF THE BOARD
PRESIDENT AND
CHIEF EXECUTIVE OFFICER ROBERT P. GRIFFITHS DELBERT R. ELLIS
PRESIDENT AND VICE CHAIRMAN OF THE BOARD
GLEN E. COUCHMAN CHIEF EXECUTIVE OFFICER
VICE PRESIDENT, JOHN E. FAHRENDORF, JR.
INFORMATION SYSTEMS EVY JOHANSEN PRESIDENT AND
SENIOR VICE PRESIDENT AND CASHIER CHIEF EXECUTIVE OFFICER
JOHN E. FAHRENDORF, JR. .
VICE PRESIDENT JANET BELL KATHLEEN L. HARRIS
CARTER R. HUHTA SENIOR VICE PRESIDENT AND CASHIER
ROBERT P. GRIFFITHS STEVEN D. OLSON
VICE PRESIDENT SENIOR VICE PRESIDENTS ROBERT W. GOLDWATER, JR.
SENIOR VICE PRESIDENT
KATHLEEN L. HARRIS GLEN E. COUCHMAN
VICE PRESIDENT AND REEM GHANEM RONALD P. CHRISTENSON
CHIEF FINANCIAL OFFICER JOHN C. LIVENSPARGER VICE PRESIDENT AND CHIEF CREDIT
PATRICIA L. PAPPAS OFFICER
EVY JOHANSEN DANIEL B. STARZYK
VICE PRESIDENT, VICE PRESIDENTS ANTHONY M. ASHTON
ADMINISTRATION DANIEL T. BERGIN
MARLENE M. KUCERA JEFFREY S. BIRKELO
MARVIN L. KOCIAN LAURA Y. LEE TIMOTHY J. BRUNNER
VICE PRESIDENT AND ANI MJUKIAN J. THOMAS HAND
ASSISTANT SECRETARY BONNIE J. OCHSNER SONDRA K. KOSKELA
ASSISTANT VICE PRESIDENTS MARK A. PURCELL
JERI A. SAFCIK
FRANZ R. RAUSCH PHILLIP D. WILSON
CONTROLLER VICE PRESIDENTS
JOSEPH R. ASHTON
SHELLY K. MARTIN
PATRICIA A. TAYLOR
ASSISTANT VICE PRESIDENTS
A.M. BUD CLIFFORD
PRIVATE BANKING OFFICER
MCGLADREY & PULLEN, LLP
IA IVERSEN + ASSOCIATES, INC.
AUDITORS
HINSHAW & CULBERTSON
LEGAL COUNSEL
</TABLE>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. For the
fiscal year ended December 31, 1998.
Commission file number 0-12292
UPBANCORP, INC.
---------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3207297
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4753 N. BROADWAY, CHICAGO, ILLINOIS 60640
- ----------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (773) 878-2000
--------------
<TABLE>
<S> <C>
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK-$1 PAR VALUE
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing for the
past 90 days. Yes X No
- --
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 9, 1999 (based upon the closing price as of such date),
was approximately $22,432,806.
The number of shares outstanding of the registrant's common stock, $1.00 par
value, as of March 9, 1999 as 868,636.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to be held
April 13, 1999, are incorporated by reference into Part III of this Form 10-K.
<PAGE>
UPBANCORP, INC.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I
<S> <C> <C>
Item 1: Business.................................................................................................3
Item 2: Properties...............................................................................................7
Item 3: Legal Proceedings........................................................................................8
Item 4: Submission of Matters to a Vote of Security Holders......................................................8
PART II
Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters................................8
Item 6: Selected Financial Data..................................................................................9
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations...................10
Item 8: Financial Statements and Supplementary Data.............................................................23
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosures...................45
PART III
Item 10: Directors and Executive Officers of the Registrant.....................................................45
Item 11: Executive Compensation.................................................................................45
Item 12: Security Ownership of Certain Beneficial Owners and Management.........................................45
Item 13: Certain Relationships and Related Transactions.........................................................45
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................46
</TABLE>
2
<PAGE>
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 of the outstanding common stock of Uptown National Bank of Chicago
("Uptown"), organized in 1929 and located in Chicago, Illinois, and Heritage
Bank ("Heritage"), organized in 1977 and located in Phoenix, Arizona. (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
$269 million at year-end 1998 and its headquarters are in Chicago, Illinois. The
majority of the operational responsibilities of each of the Subsidiary Banks
rests with their respective Officers and Directors.
The Company and its Subsidiary Banks employed approximately 141
full-time equivalent employees at December 31, 1998.
SUBSIDIARY BANKS
The Company's affiliates consist of two full-service community banks,
which operate five banking offices in northern Chicago and metropolitan Phoenix.
Approximately 77% of its banking assets are related to Uptown with the remainder
related to Heritage.
Both Subsidiary Banks are engaged in the general commercial banking
business in addition to offering a complete range of retail banking services.
The Subsidiary Banks conduct a general banking business which embraces all of
the usual functions, both commercial and consumer, and which they may lawfully
provide, including, but not limited to: the acceptance of deposits to demand,
savings and time accounts and the servicing of such accounts; commercial,
industrial, consumer and real estate lending; safe deposit box operations; and
other banking services tailored for both commercial and retail clients.
Uptown has one wholly-owned subsidiary, Broadway Clark Building
Corporation ("BCBC"), which is an Illinois corporation. BCBC owns all of the
real estate that is used in connection with the operation of Uptown's business
with the exception of two facilities, which are leased.
SUPERVISION AND REGULATION
The Company and its Subsidiary Banks are subject to regulation and
supervision by various governmental regulatory authorities including, but not
limited to, the Board of Governors of the Federal Reserve System (the "FRB"),
the Office of the Comptroller of the Currency (the "OCC"), the Federal Deposit
Insurance Corporation (the "FDIC"), the 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.
3
<PAGE>
The Company is subject to supervision and regulation by the FRB, under
the Bank Holding Company Act of 1956, as amended.
Uptown is chartered under the National Bank Act, as amended, and is
subject to the examination, supervision, reporting and enforcement requirements
of the OCC, as the chartering authority for national banks, and the FDIC as the
administrator of the Bank Insurance Fund. The Bank is a member of the Federal
Reserve System.
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 1934, as amended. Consequently, the Company is subject to the
information, proxy solicitation, insider trading and other restrictions and
requirements of the SEC under such act.
GOVERNMENTAL MONETARY POLICIES AND ECONOMIC CONDITIONS
The earnings of the Company are affected in important respects by
general economic conditions and also by the fiscal and monetary policies of the
federal government and its agencies. In particular, the FRB regulates the
national supply of bank credit in order to achieve, among other things, maximum
employment and a stable price level. Among the instruments of monetary policy
used by the FRB to implement these objectives are: open market transactions in
United States government securities, changes in the discount rate on member bank
borrowings and changes in reserve requirements against member bank deposits.
These means are used in varying combinations to influence overall growth of bank
loans, investments, and deposits, and they may also affect interest rates
charged on loans or paid for deposits.
Interest rate sensitivity has a major impact on the yields earned on
assets of the Subsidiary Banks. As market rates change, yields earned on assets
may not necessarily move to the same degree as rates paid on liabilities. For
this reason, the Subsidiary Banks attempt to minimize earnings volatility
related to fluctuations in interest rates through the use of formal
asset/liability management programs which identify imbalances between the
repricing of earning assets and funding sources, among other things.
In addition to the policy of the FRB, the Company's earnings are also
affected by the FDIC insurance premiums and the annual fees charged by the
various regulatory authorities. The Company cannot fully predict the nature or
the extent of any effect which such fiscal and monetary policies may have on its
business and earnings.
COMPETITION
The principal methods of competition between commercial banks is
generally expressed in terms of price, including interest rates paid on deposits
and interest rates charged on borrowings, fees charged on fiduciary services,
quality of services to customers, ease of access to services, and the offering
of additional services. More recently, technological advances such as PC
banking, telebanking, point-of-sale debit cards and electronic data interchange
have also resulted in intensified competition with traditional banking
distribution systems.
Both Illinois and Arizona are highly competitive markets for banking
and related financial services. Since these areas are the Company's primary
focus markets, the Subsidiary Banks are exposed to varying types and levels of
competition. In general, each Subsidiary Bank competes, anticipates and responds
within
4
<PAGE>
each individual market area. Both Subsidiary Banks compete and rely heavily on
the high level of quality service provided to our customers. The Company has
seen the level of competition and number of competitors in its market places
increase in recent years and expects a continuation of these competitive market
conditions.
CAPITAL GUIDELINES
The FRB, the OCC and the FDIC have risk-based capital guidelines which
provide a framework for assessing the adequacy of the capital of banks and bank
holding companies (collectively "banking institutions"). These guidelines apply
to all banking institutions regardless of size and are used in the examination
and supervisory process as well as in the analysis of applications to be acted
upon by the regulatory authorities. These guidelines require banking
institutions to maintain capital based on the credit risk of their operations.
The risk-based capital guidelines are designed to require the
maintenance of capital commensurate with both on and off-balance sheet credit
risks. The minimum ratios established by the guidelines are based on both Tier 1
and total capital to total risk-based assets. Total risk-based assets are
calculated by assigning each on-balance sheet asset and off-balance sheet item
to one of four risk categories depending on the nature of each item. The amount
of the items in each category is then multiplied by the risk-weight assigned to
that category (0%, 20%, 50% or 100%). Total risk based assets equals the sum of
the resulting amounts. Tier 1 capital is generally defined as shareholders'
equity less intangible assets and total capital is generally defined to include
Tier 1 capital plus limited levels of the allowance for loan losses.
In addition to the risk-based capital requirements, the FRB, the OCC
and the FDIC require institutions to maintain a minimum leveraged-capital ratio
to supplement the risk-based capital guidelines. The leverage ratio is intended
to ensure that adequate capital is maintained against risks other than credit
risk.
The Company and the Subsidiary Banks exceed the minimum required
capital guidelines for both risk-based capital ratios and the leverage ratio at
December 31, 1998. 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. This limits the ability of the Company
to pay dividends. Since the Company is a legal entity, separate and distinct
from its affiliates, its dividends are not subject to such bank regulatory
guidelines. The holders of the Company's common stock are entitled to receive
such dividends as are declared by the Board of Directors. For a further
discussion of dividends, see Note 12 "Restrictions on Retained Earnings" in the
Notes to Consolidated Financial Statements included under Item 8 of this Form
10-K.
NATIONAL BANKING ASSOCIATION RESTRICTIONS
Uptown is a national banking association and is limited with respect to
the amount of dividends which it can pay to its shareholders under Sections 56
and 60 of the National Bank Act.
Section 56 restricts a national bank from paying dividends if it would
impair the institution's capital by barring any payments in excess of "net
profits then on hand". Section 56 further requires that a bank deduct losses and
bad debts from "net profits then on hand". It also specifies that a portion of a
bank's capital surplus account may be included as "net profits then on hand" to
the extent that it represents earnings from prior periods.
5
<PAGE>
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.
6
<PAGE>
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
Aircraft Lending Office:
43 W 518 Route 30 Leased 1,800
Aurora Municipal Airport
Sugar Grove, 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
Tempe, Arizona
Mortgage Lending Office:
4222 E. Camelback Road Leased 1,641
Suite H200
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, 1998, the properties and equipment of the Company had
an aggregate net book value of approximately $6.3 million.
Note 1: These locations are owned by Uptown's 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.
7
<PAGE>
ITEM 3: LEGAL PROCEEDINGS
Neither the Company nor its Subsidiary Banks are party to any
litigation, which in the judgment of management after consultation with counsel,
would have a material effect on the financial position or results of operations
of the Company or the Subsidiary Banks.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
At a Special Meeting of Shareholders held October 20, 1998, the
following amendment to the Corporation's Certificate of Incorporation was
approved: The number of authorized shares of common stock was increased from
300,000 to 3,000,000 and the par value of each share was reduced from $10.00 to
$1.00.
PART 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, 1998, there were 326 shareholders of
record. The following table sets forth common stock information during each
quarter of 1998 and 1997. This information has been adjusted to reflect the
Company's four-for-one stock split in October, 1998.
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------- ---------------------------------------------------
MARKET PRICE OF Fourth Third Second First Fourth Third Second First
COMMON STOCK: ---------- ------------ ----------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $ 36.25 $ 36.25 $ 37.25 $ 36.25 $ 31.13 $ 24.38 $ 20.00 $ 18.75
Low 35.00 35.69 35.50 32.75 24.75 20.50 17.75 16.88
Quarter-End 35.25 36.25 35.84 36.25 31.13 23.75 20.00 17.75
CASH DIVIDENDS PER SHARE 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125
--------------------------------------------------------------------------------------------------------
</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 Note 12 in the Notes to Consolidated
Financial Statements found under Item 8 of this Form 10-K.
8
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
The following Selected Financial Data is not covered by the report of
independent public accountants and should be read in conjunction with the
consolidated financial statements and accompanying notes included elsewhere in
this Form 10-K. A more detailed discussion and analysis of factors affecting the
Company's financial position and operating results is presented in Management's
Discussion and Analysis of Financial Condition and Results of Operations found
under Item 7 of this Form 10-K.
Consolidated financial information reflecting a summary of the
operating results and financial condition of the Company for the five years
ended December 31, 1998 is presented in the following table (all per share data
has been adjusted to reflect the Company's four for one stock split in October,
1998):
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 1995 1994
-------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Interest income $ 20,040 $ 17,722 $ 15,805 $ 15,312 $ 13,884
Interest expense 7,109 6,115 5,425 5,383 4,884
-------- -------- -------- --------- --------
Net interest income 12,931 11,607 10,380 9,929 9,000
Provision for loan losses 580 410 914 717 291
Other income 3,154 2,667 2,440 1,982 1,790
Other expense 11,940 10,760 10,059 9,551 9,447
-------- -------- -------- --------- --------
Income before income taxes 3,565 3,104 1,847 1,643 1,052
Applicable income taxes 1,265 1,127 693 625 246
-------- -------- -------- --------- --------
Net income $ 2,300 $ 1,977 $ 1,154 $ 1,018 $ 806
-------- -------- -------- --------- --------
-------- -------- -------- --------- --------
PER SHARE DATA:
Net income $ 2.63 $ 2.24 $ 1.30 $ 1.15 $ 0.91
Cash dividends declared 0.50 0.50 0.50 0.50 0.50
Dividend payout ratio 19.04% 22.31% 38.39% 43.61% 55.09%
Book value (1) 26.02 23.79 21.36 20.76 19.50
Market price 35.25 31.13 17.06 15.00 14.38
BALANCE SHEET HIGHLIGHTS:
Assets $269,462 $231,377 $ 226,395 $206,341 $210,234
Loans, net of unearned discount 195,095 166,252 131,069 111,208 98,518
Deposits 226,034 198,132 195,302 180,773 186,087
Shareholders' equity 22,638 21,000 18,856 18,434 17,316
Average equity to average asset ratio 8.69% 8.73% 8.58% 8.63% 8.49%
PERFORMANCE RATIOS:
Return on average assets .91% .87% .54% .49% .39%
Return on average shareholders' equity 10.44% 9.98% 6.28% 5.66% 4.55%
</TABLE>
(1) Book value per share is calculated by dividing total shareholders' equity
at December 31, 1998 by the number of shares common stock outstanding at
year-end.
9
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
The following management's discussion and analysis of financial
condition and results of operations should be read in conjunction with the
Company's Consolidated Financial Statements and Notes to Consolidated Financial
Statements presented in Item 8 of this Form 10-K as well as the Selected
Financial Data presented in Item 6 of this Form 10-K.
This discussion and analysis is intended to address significant factors
affecting the Company's consolidated statements of condition and statements of
income for the past three years. The discussion is designed to provide
shareholders with a comprehensive review of the operating results and financial
condition of the Company.
SUMMARY
The Company's consolidated net income for 1998 totaled $2,300 or $2.63
per share. This is compared to net income and earnings per share of $1,977 or
$2.24 and $1,154 or $1.30 for 1997 and 1996, respectively. The results of 1998
represent a 16% improvement in net income from 1997 after a 71% improvement in
1997 over 1996. As we noted last year and, again, consistent in the current
year, the earnings improvement is mostly attributable to increased net interest
income and mortgage banking fees collected.
The operating performance of bank holding companies is often measured
and comparisons made based on net income to average assets and net income to
average equity. The Company's return on average shareholders' equity for 1998
was 10.44% as compared to 9.98% in 1997 and 6.28% in 1996. Return on average
assets for 1998 was .91% as compared to .87% in 1997 and .54% in 1996.
Non-performing loans decreased as a percentage of outstanding loans
during the past three year period. Non-performing loans totaled $1,309 or .67%
of net loans at December 31, 1998 as compared to $1,148 or .69% in 1997 and
$2,112 or 1.61% in 1996.
Upbancorp continues to maintain a strong capital base at December 31,
1998. Consolidated capital levels as well as the individual Subsidiary Banks'
capital ratios exceed minimum capital requirements.
NET INTEREST INCOME
Net interest income, which is the difference between interest and fees
earned on assets and the interest paid on deposits and other funding sources, is
the primary source of earnings for the Company. This component represents 80% of
the Company's net revenues in 1998. A detailed analysis highlighting the changes
in net interest income is provided in Table 2. Interest earned on tax-exempt
loans and investments is adjusted for comparative purposes to a taxable
equivalent basis using the federal tax rate of 34%, resulting in a fully taxable
equivalent ("FTE") net interest income.
Net interest income on a fully taxable equivalent basis totaled $13,115
in 1998 compared to $11,720 in 1997 and $10,442 in 1996. The significant
increase in net interest income in 1998 includes an increase of $1,844 due to
volume increases in 1998 following a $1,259 increase due to volume in 1997. Rate
movements negatively impacted the overall improvement in net interest income by
$395 after positively impacting net interest income by $3 in 1997.
The 1998 volume increase was fueled by the earning assets added to the
balance sheet. Average interest earning assets increased by $25,124 or 11.98%.
The majority of that increase is the result of growth
10
<PAGE>
in average loan balances due in large part to the strong real estate markets in
both the Chicago and Phoenix metropolitan areas. In addition, we recognize
continued success of the aircraft lending division, which was augmented by the
purchase of Zook Pilot Services in early October. The loan growth was funded via
a more aggressive pricing strategy with regard to time deposits and a greater
utilization of borrowed funds as well as maturities and selective sales in our
investment portfolio.
Net interest margin represents net interest income as a percentage of
total interest earning assets. The Company attempts to favorably impact net
interest income through investment decisions on interest earning assets and
monitoring interest rates its banking subsidiaries offer, particularly rates for
time deposits and short-term borrowings. The Company's net interest spread
measured on a fully taxable equivalent basis decreased slightly to 5.58% in 1998
from 5.59% in 1997.
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
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------------------------------
Average Yield/ Average Yield/
ASSETS: Balance Interest Rate Balance Interest Rate
----------- --------- ---- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Taxable $ 42,108 $ 2,540 6.03% $ 54,005 $ 3,263 6.04%
Non-taxable (1)(2) 4,015 399 9.94% 2,189 236 10.78%
Federal funds sold 8,355 437 5.23% 7,390 401 5.43%
Mortgages held-for-sale 2,314 118 5.10% 1,262 83 6.58%
Loans, net of unearned
discount (2)(3) 178,076 16,730 9.39% 144,898 13,852 9.56%
----------- -------- ---- --------- -------- -----
Total interest earning
assets (1)(2)(3) $ 234,868 $ 20,224 8.61% $ 209,744 $ 17,835 8.50%
----------- -------- ---- --------- -------- -----
Cash and due from banks 10,073 8,633
Reserve for loan losses (2,247) (1,700)
Other assets 10,865 10,402
----------- ---------
Total assets $ 253,559 $ 227,079
----------- ---------
----------- ---------
LIABILITIES &
SHAREHOLDERS' EQUITY:
Savings, NOW and
money market deposits $ 100,853 $ 2,670 2.65% $ 101,227 $ 2,577 2.55%
Other time deposits 67,727 3,630 5.36% 59,361 3,158 5.32%
Borrowed funds 14,955 809 5.83% 6,521 380 5,83%
----------- -------- ---- --------- -------- -----
Total interest bearing $ 183,535 $ 7,109 3.87% $ 167,109 $ 6,115 3.66%
liabilities
----------- -------- ---- --------- -------- -----
Demand deposits 45,306 38,254
Other liabilities 2,685 1,897
Shareholders' equity 22,033 19,819
----------- ---------
Total liabilities and
shareholders' equity $ 253,559 $ 227,079
----------- ---------
----------- ---------
-------- ---- --------- ----
Net interest income/margin (1)(3) $ 13,115 4.74% $ 11,720 4.84%
-------- ---- --------- ----
-------- ---- --------- ----
Net interest income/earning assets 5.58% 5.59%
---- ----
---- ----
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------
Average Yield/
ASSETS: Balance Interest Rate
-------------------------------------------------------------
<S> <C> <C> <C>
Investment securities:
Taxable $ 66,002 $ 3,930 5.95%
Non-taxable (1)(2) 1,834 145 7.91%
Federal funds sold 8,588 451 5.25%
Mortgages held-for-sale 616 48 7.79%
Loans, net of unearned
discount (2)(3) 120,427 11,293 9.38%
--------- --------- ----
Total interest earning
assets (1)(2)(3) $ 197,467 $ 15,867 8.04%
--------- --------- ----
Cash and due from banks 8,366
Reserve for loan losses (1,464)
Other assets 9,876
--------
Total assets $ 214,245
--------
--------
LIABILITIES &
SHAREHOLDERS' EQUITY:
Savings, NOW and
money market deposits $ 98,437 $ 2,307 2.34%
Other time deposits 52,499 2,674 5.09%
Borrowed funds 7,912 444 5.61%
--------- --------- ----
Total interest bearing liabilities $ 158,848 $ 5,425 3.42%
--------- --------- ----
Demand deposits 35,317
Other liabilities 1,697
Shareholders' equity 18,383
---------
Total liabilities and
shareholders' equity $ 214,245
----------
---------- --------- ----
Net interest income/margin (1)(3) $ 10,442 4.62%
--------- ----
--------- ----
Net interest income/earning assets 5.29%
----
----
</TABLE>
(1) Interest income and yields on non-taxable securities are reflected on a
tax equivalent basis based upon a statutory Federal income tax rate of
34% for 1998, 1997 and 1996.
(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
$907, $773, and $648 for the years ended December 31, 1998, 1997, and
1996, respectively. At December 31, 1998, 1997, and 1996, deferred loan
and commitment fee income, net of direct loan origination costs,
totaled $235, $244, and $277, respectively.
11
<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>
<CAPTION>
TABLE 2
CHANGES IN NET INTEREST INCOME APPLICABLE TO VOLUMES AND INTEREST RATES
1998 COMPARED TO 1997 Interest Income/Expense Increase/(Decrease)due to:
- --------------------- ------------------------------------------ ---------------------------------------
Increase Volume/
1998 1997 (Decrease) Volume Rate Rate
-------------- -------------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Taxable $ 2,540 $ 3,263 $ (723) $ (719) $ (5) $ 1
Non-taxable (1) 399 236 163 197 (18) (15)
Federal funds sold 437 401 36 52 (14) (2)
Mortgages held-for-sale 118 83 35 69 (19) (16)
Loans, net of unearned discount 16,730 13,852 2,878 3,172 (239) (55)
--------- --------- ------- ------- ------ -------
Total interest income (1) $ 20,224 $ 17,835 $ 2,389 $ 2,771 $ (296) $ (86)
--------- --------- -------- -------- ------ -------
--------- --------- -------- -------- ------ -------
Savings, NOW and money market deposits 2,670 2,577 93 (10) 103 (0)
Other time deposits 3,630 3,158 472 445 24 3
Borrowed funds 809 380 429 491 (27) (35)
--------- --------- -------- -------- ------ -------
Total interest expense 7,109 6,115 994 927 99 (32)
--------- --------- -------- -------- ------ -------
Net interest income $ 13,115 $ 11,720 $ 1,395 $ 1,844 $ (395) $ (54)
--------- --------- -------- -------- ------ -------
--------- --------- -------- -------- ------ -------
</TABLE>
<TABLE>
<CAPTION>
1997 COMPARED TO 1996 Interest Income/Expense Increase/(Decrease) due to:
- --------------------- ------------------------------------------ ---------------------------------------
Increase Volume/
1997 1996 (Decrease) Volume Rate Rate
--------------- --------------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Taxable $ 3,263 $ 3,930 $ (667) $ (714) $ 58 $ (11)
Non-taxable (1) 236 145 91 28 53 10
Federal funds sold 401 451 (50) (63) 15 (2)
Mortgages held-for-sale 83 48 35 50 (7) (8)
Loans, net of unearned discount 13,852 11,293 2,559 2,295 220 45
---------- ---------- -------- -------- ------ -------
Total interest income (1) $ 17,835 $ 15,867 $ 1,968 $ 1,596 $ 338 $ 34
---------- ---------- -------- -------- ------ -------
---------- ---------- -------- -------- ------ -------
Savings, NOW and money market deposits 2,577 2,307 270 65 199 6
Other time deposits 3,158 2,674 484 350 119 16
Borrowed funds 380 444 (64) (78) 17 (3
---------- ---------- -------- -------- ------ -------
Total interest expense 6,115 5,425 690 337 335 18
---------- ---------- -------- -------- ------ -------
Net interest income $ 11,720 $ 10,442 $ 1,278 $ 1,259 $ 3 $ 16
---------- ---------- -------- -------- ------ -------
---------- ---------- -------- -------- ------ -------
</TABLE>
(1) Interest income and yields on non-taxable securities are reflected on a
tax equivalent basis based upon a statutory Federal income tax rate of
34% for 1998, for 1997 and 1996.
FUNDS MANAGEMENT ANALYSIS AND INTEREST RATE SENSITIVITY
The earning asset portfolio of community banks is typically the leading
determinate of performance for the Company. This is because the largest
percentage of total income for the Company is attributable to net interest
income. The policies and practices for managing liquidity risk and interest rate
risk are set by the Subsidiary Banks' Funds Management Committees ("FMCs") whose
goal is to ensure maximum returns within safe and sound risk parameters. The
FMCs monitor exposures in view of market developments and the Subsidiary Banks'
financial conditions, set guidance for interest rate risk management decisions,
ensure consistency in the measurement of risk and monitor 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.
12
<PAGE>
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, 1998 is presented in
Table 3. Earning assets and interest bearing liabilities are presented within
selected time intervals based upon their repricing and maturity characteristics.
In a perfectly matched gap analysis, an equal amount of rate sensitive assets
and liabilities would be reflected as repricing within each given time interval.
A positive interest rate sensitivity gap indicates more assets than liabilities
will reprice in that time period, while a negative gap indicates more
liabilities will reprice. Generally, a positive gap position, or asset sensitive
position, has a favorable impact on net interest income in periods of rising
interest rates. Conversely, a negative gap would generally imply a favorable
impact on net interest income in periods of declining interest rates.
TABLE 3
REMAINING MATURITY OR EARLIEST POSSIBLE PRICING
<TABLE>
<CAPTION>
Up to
3 3-12 1-3 3-5 Greater than
Months Months Years Years 5 Years Total
--------- --------- -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Federal funds sold $ 10,000 $ -- $ -- $ -- $ -- $ 10,000
Investment securities - Debt (1) -- 426 5,335 15,936 15,760 37,457
Investment securities - Equity (1) -- -- -- -- 4,922 4,922
Loans and mortgages held-for-sale (1) 60,443 14,053 24,114 78,857 20,696 198,163
-------- -------- -------- -------- -------- --------
Total Rate Sensitive Assets 70,443 14,479 29,449 94,793 41,378 250,542
-------- -------- -------- -------- -------- --------
RATE SENSITIVE LIABILITIES:
Savings, NOW, and
money market deposits 37,523 24,389 26,834 15,321 -- 104,067
Other time deposits 27,479 33,156 11,846 2,424 -- 74,905
Borrowed funds 8,097 -- 10,000 -- -- 18,097
-------- -------- -------- -------- -------- --------
Total Rate Sensitive Liabilities 73,099 57,545 48,680 17,745 -- 197,069
-------- -------- -------- -------- -------- --------
INTEREST SENSITIVITY GAP:
Incremental $ (2,656) $(43,066) $(19,231) $ 77,048 $ 41,378 $ 53,473
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Cumulative $ (2,656) $(45,722) $(64,953) $ 12,095 $ 53,473
CUMULATIVE INTEREST SENSITIVE
GAP AS A PERCENTAGE OF
TOTAL EARNING ASSETS -1% -18% -26% 5% 21%
</TABLE>
(1) Loans and securities on a non-accrual basis are not included as a part of
this analysis.
Table 3 shows the under-one-year net liability position at December 31,
1998 was ($45,722) (16.97% of total assets), compared to the under-one-year net
liability position of ($11,548) at December 31, 1997 (4.99% of total assets). A
significant under-one-year net liability position would indicate that the
Company's net interest income is exposed to rising short-term interest rates,
while a significant net asset position would mean an exposure to declining
short-term interest rates. Upbancorp and 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.
13
<PAGE>
The following table shows the Company's available-for-sale investment
securities' maturity distribution and corresponding tax-equivalent yields at
December 31, 1998:
TABLE 4
SECURITIES AVAILABLE-FOR-SALE
MATURITY DISTRIBUTION AND PORTFOLIO YIELDS
<TABLE>
<CAPTION>
One year One year Five years After
or less to five years to ten years ten years
--------------------- --------------------- --------------------- ---------------------
Amortized Yield Amortized Yield Amortized Yield Amortized Yield
Cost (%) Cost (%) Cost (%) Cost (%)
----------- --------- ---------- --------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Agency securities $ 196 4.41% $20,298 6.07% $ 5,000 6.14% - -
States and political subdivisions 190 10.83% 523 8.15% 1,666 7.69% 3,378 7.69%
Other debt securities - - - - 30 6.25% - -
----------- --------- ---------- --------- ----------- -------- ----------- --------
Total $ 386 7.57% $20,821 6.12% $ 6,696 6.53% $ 3,378 7.69%
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Amortized Yield
Cost (%)
----------- ---------
<S> <C> <C>
Collateralized mortgage obligations
and other mortgage-backed securities $ 5,736 5.96%
-----------
-----------
Equity securities $ 4,748 6.09%
-----------
-----------
</TABLE>
Of the $5,736 of collateralized mortgage obligations and other
mortgage-backed securities depicted above, all were issued or guaranteed by
various U.S. Government sponsored agencies.
LOAN PORTFOLIO
The following table shows the major classifications of loans at
December 31:
TABLE 5
LOAN PORTFOLIO
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial - Aircraft related $ 26,617 $ 17,846 $ 9,154 $ 492 $ --
Commercial - Other 33,395 30,361 30,344 29,117 25,743
Secured by real estate - Construction 22,365 9,440 9,829 16,249 6,462
Secured by real estate - Farmland -- -- 62 64 65
Secured by real estate - Residential (1 to 4 family) 30,971 34,899 34,071 27,415 23,128
Secured by real estate - Residential (5 or more) 29,900 27,635 19,736 14,127 16,947
Secured by real estate - Non-residential 45,640 40,984 23,925 18,705 19,568
Consumer, net of unearned discount 6,207 5,087 3,948 5,039 6,605
--------- --------- --------- --------- ---------
Total loans 195,095 166,252 131,069 111,208 98,518
Less: Allowance for loan losses (2,499) (2,010) (1,485) (1,402) (1,605)
--------- --------- --------- --------- ---------
Total loans, net of allowance for loan losses $ 192,596 $ 164,242 $ 129,584 $ 109,806 $ 96,913
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
14
<PAGE>
The commercial loan maturities and sensitivity to changes in interest
rates at December 31, 1998, are shown in the following table:
TABLE 6
COMMERCIAL LOAN MATURITIES AND SENSITIVITIES TO CHANGES IN INTEREST RATES
<TABLE>
<CAPTION>
After one
In one year through Over
or less five years five years Total
----------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Commercial loan maturities $24,973 $33,977 $ 1,062 $60,012
------- ------- ------- -------
------- ------- ------- -------
Interest rate sensitivity:
Fixed rate $ 4,759 $33,364 $ 1,062 $39,185
Variable rate 20,214 613 -- 20,827
------- ------- ------- -------
Total $24,973 $33,977 $ 1,062 $60,012
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
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. For a further review of the
Company's sources and uses of funds, see the Consolidated Statements of Cash
Flows found in Item 8 of this Form 10-K.
The Company requires adequate liquidity to pay its expenses and pay
shareholder dividends. Liquidity is provided to the Company from the Subsidiary
Banks in the form of dividends. Other liquidity is provided by cash balances in
banks, maturing investments and interest on investments. For a discussion of
dividend payments, please see Note 12 in the Notes to Consolidated Financial
Statements found in Item 8 of this Form 10-K. One method of analyzing the
Company's liquidity position is through a careful review of available funding
sources. The following table provides information as it pertains to funding
sources and reflects a year-to-year comparison of the sources of the Company's
liability funding based upon year-end balances.
TABLE 7
FUNDING SOURCES - YEAR-END BALANCES
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Demand deposits $ 47,062 $ 40,088 $ 40,009
Savings, NOW & money market deposits 104,067 98,660 100,519
Other time deposits of $100 or less 55,021 44,409 42,190
-------- -------- --------
Core deposits 206,150 183,157 182,718
Other time deposits of $100 or more 19,884 14,975 12,584
Borrowed funds 18,097 10,037 10,561
-------- -------- --------
Total funding sources $244,131 $208,169 $205,863
-------- -------- --------
-------- -------- --------
</TABLE>
Total funding sources increased 17.28% at December 31, 1998 from prior
year levels. Core deposits increased 12.55% from December 31, 1997 balances
while other time deposits $100 or more grew at a 32.78% rate. A recap of other
time deposits $100 and over is presented in the following table. For a review of
total other time deposit maturities, see Note 6 in the Notes to Consolidated
Financial Statements found in Item 8 of this Form 10-K. A recap of borrowed
funds can be found in Note 7 in the Notes to Consolidated Financial Statements
found in Item 8 of this Form 10-K.
15
<PAGE>
TABLE 8
REMAINING MATURITY OF OTHER TIME DEPOSITS - $100,000 AND OVER
<TABLE>
<S> <C>
Three months or less $ 5,243
Over 3 through 6 months 6,560
Over 6 through 12 months 4,567
Over 12 months 3,514
--------------
$ 19,884
--------------
--------------
</TABLE>
Borrowing facilities are available to the Subsidiary Banks through
various correspondent banks in the amount of $22,000. These lines are
established for the purpose of borrowing on an overnight basis in the form of
Federal Funds. In addition, Uptown has borrowing capacity with the Federal Home
Loan Bank of Chicago in the amount of $18,000 for short and long-term
borrowings. These borrowings are to be secured by qualifying 1-4 family first
mortgages, private mortgage backed securities or U.S. Treasury and Agency
Obligations.
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, 1998, all entities exceeded regulatory established
minimums as defined for financial institutions.
Total shareholders equity increased 7.80% to $22,638 at December 31,
1998. Total equity as a percentage of assets was 8.40% at the end of 1998 versus
9.08% a year earlier. Included in shareholders equity is the net unrealized gain
on securities classified as available-for-sale, which amounted to $253 at the
end of 1998 and $19 as of the end of 1997. Please see Note 13 in the Notes to
Consolidated Financial Statements found in Item 8 of this Form 10-K.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for
loan losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that the full collection of the loan principal
is unlikely. The level of the provision for loan losses charged to operating
expense as well as the balances maintained in the allowance for loan losses is
dependent upon many factors, including loan growth, changes in the composition
of the loan portfolio, net charge-off levels, delinquencies, collateral values
and management's assessment of current and prospective economic conditions in
the Company's primary market areas.
The Subsidiary 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 as 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 that an adequate
allowance has been established for these individual assets.
The allowance for loan losses is comprised of both allocated and
unallocated allowances in order to quantify future loss potential. The allocated
position represents management's assessment as to potential loss exposure based
on both actual loan losses experienced historically and independent credit
ratings on individual credits. The unallocated portion is that which is not
specifically allocated to a particular loan or
16
<PAGE>
general loan category. At December 31, 1998, the allowance for loan losses was
comprised of $1,576 and $923 of allocated and unallocated reserves,
respectively.
TABLE 9
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 2,010 $ 1,485 $ 1,402 $ 1,605 $ 1,421
Loan charge-offs:
Commercial - Other 130 12 256 403 204
Real estate - Residential (1 to 4 family) -- 1 -- 18 --
Real estate - Residential (5 or more) -- -- 607 66 --
Real estate - Non-Residential -- -- -- 460 --
Consumer, net of unearned discount 25 15 33 1 2
------- ------- ------- ------- -------
Total charge-offs 155 28 896 948 206
Recoveries:
Commercial - Other 64 55 62 25 82
Real estate - Residential (5 or more) -- 86 -- -- --
Real estate - Non-Residential -- -- -- -- 9
Consumer, net of unearned discount -- 2 3 3 8
------- ------- ------- ------- -------
Total recoveries 64 143 65 28 99
Net charge-offs (recoveries) 91 (115) 831 920 107
Provision for loan losses 580 410 914 717 291
------- ------- ------- ------- -------
Balance at end of year $ 2,499 $ 2,010 $ 1,485 $ 1,402 $ 1,605
------- ------- ------- ------- -------
------- ------- ------- ------- -------
As a percent of average loans:
Net loan charge-offs 0.05% -0.08% 0.69% 0.86% 0.11%
Provision for loan losses 0.33% 0.28% 0.76% 0.67% 0.31%
Allowance for loan losses
as a percentage of net loans: 1.28% 1.21% 1.13% 1.26% 1.63%
Allocation of allowance:
Commercial - Aircraft related 426 268 137 5 --
Commercial - Other 684 772 765 841 972
Secured by real estate 377 11 222 274 285
Consumer 89 89 107 102 99
Unallocated 923 870 254 180 249
------- ------- ------- ------- -------
Balance at end of year $ 2,499 $ 2,010 $ 1,485 $ 1,402 $ 1,605
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Loan balance as a percent of total loans:
Commercial - Aircraft related 14% 11% 7% 0% 0%
Commercial - Other 17% 18% 23% 26% 26%
Secured by real estate 66% 68% 67% 69% 67%
Consumer 3% 3% 3% 5% 7%
</TABLE>
As indicated by this table, the provision for loan losses amounted to
$580 for 1998 compared to $410 in 1997 and $914 in 1996. This increase in the
1998 provision is due to the continued growth in the Company's loan portfolio.
The allowance for loan losses amounted to $2,499 for 1998 compared to
$2,010 in 1997 and $1,485 in 1996. Allowance levels are the result of the
Company's analysis of potential loan losses and the adequacy level as defined by
management's internal analysis.
17
<PAGE>
NON-PERFORMING ASSETS
One measurement used by management in assessing the risk inherent in
the loan portfolio is the level of 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 whose principal and
interest payments are delinquent 90 days or more and are still accruing
interest.
The following table summarizes non-performing assets and past due loans
for the past five years as well as certain information related to interest
income on non-accrual loans:
TABLE 10
ANALYSIS OF NON-PERFORMING ASSETS AND PAST DUE LOANS
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $1,234 $ 252 $1,158 $2,369 $3,637
Restructured loans 75 896 954 1,430 312
------ ------ ------ ------ ------
Total non-performing loans 1,309 1,148 2,112 3,799 3,949
Non-performing securities, at market -- -- 134 134 --
Other real estate owned -- 334 334 1,343 335
------ ------ ------ ------ ------
Total non-performing assets $1,309 $1,482 $2,580 $5,276 $4,284
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Percentage of non-performing loans/loans,
net of unearned discount 0.67% 0.69% 1.61% 3.42% 4.01%
Percentage of non-performing assets/total assets 0.49% 0.64% 1.14% 2.56% 2.04%
Past due loans, not included above $ -- $ -- $ 5 $ 4 $ 3
Percentage of total net loans 0.00% 0.00% 0.00% 0.00% 0.00%
Percentage of total assets 0.00% 0.00% 0.00% 0.00% 0.00%
Interest income not recognized due to
non-accrual status of loans $ 164 $ 64 $ 282 $ 419 $ 309
</TABLE>
Non-performing assets have decreased for three consecutive years and
have reached their lowest level in 14 years. This trend is a result of a strong
economy and the effectiveness of the Subsidiary Banks' loan administration and
workout procedures. As shown in Table 10, at December 31, 1998, non-performing
assets totaled $1,309, a $173 decrease from 1997. This decrease is primarily a
result of the sale of other real estate owned at year-end 1998. As a result, the
percentage of non-performing assets to total assets was reduced 24.16% to 0.49%.
NON-INTEREST INCOME
Non-interest income consists primarily of service charges on customer
deposit accounts and fees earned from mortgage banking activities. Total
non-interest income increased 18.26% to $3,154 in 1998 compared to 1997. 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, 1996
through 1998.
18
<PAGE>
TABLE 11
NON-INTEREST INCOME COMPONENTS
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Service charges on deposit accounts $ 1,481 $ 1,215 $ 1,247
Mortgage banking fees 1,258 907 625
Net loss on securities (28) (107) (105)
Other non-interest income 317 475 470
Net gains from sale of loans 126 177 203
----------- ----------- -----------
Total non-interest income $ 3,154 $ 2,667 $ 2,440
----------- ----------- -----------
----------- ----------- -----------
</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. These charges increased 21.89% in 1998
over 1997 levels.
Mortgage banking activities at Heritage have 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 Heritage's core
earnings performance. Heritage does not retain servicing rights to these
mortgage loans sold. Mortgage banking fee income of $1,258, an increase of
38.70%, was recognized in 1998 along with interest income of $118.
Net loss on securities result from the sale of securities from the
investment portfolio. For a review of gains and losses related to the investment
portfolio, see Note 3 in the Notes to Consolidated Financial Statements found in
Item 8 of this Form 10-K.
NON-INTEREST EXPENSE
Total non-interest expense increased $1,174 or 10.91%, in 1998 after
increasing $701, or 6.97% in 1997. This is reflective of the incremental
increase in salaries and benefits which result from the necessary staffing
increases due to the loan and deposit growth pattern as well as new branch
facilities. In addition, staffing has been increased in connection with the sale
of mortgage loans as well as the participation of various commercial loans to
other banking institutions. Another component of this increase is the financial
impact of the Company's technological advancements made during the year.
Wide-area networks were implemented in addition to conversion of the Subsidiary
Banks' data processing systems.
A key indicator of a bank's ability to maintain low overhead while
generating net income is the bank's efficiency ratio. A lower ratio indicates a
bank's ability to maintain a lower cost operation in comparison to the resulting
income produced. The Company's efficiency ratio continues to improve; for the
year-ended December 31, 1998, the Company had a 74% efficiency ratio as compared
to 75% for the prior year's period. The following table analyzes the various
components of non-interest expense for the years ended December 31, 1996 through
1998.
19
<PAGE>
TABLE 12
NON-INTEREST EXPENSE COMPONENTS
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1998 1997 1996
-------------- --------------- --------------
<S> <C> <C> <C>
Salaries and employee benefits:
Core bank employees $ 6,003 $ 5,432 $ 5,113
Mortgage lending group 911 666 499
-------------- --------------- --------------
Total 6,914 6,098 5,612
-------------- --------------- --------------
Net occupancy expense 647 680 514
Equipment expense 811 579 780
Outside fees and services 703 979 735
Advertising and business
development expense 406 316 322
Supplies expense 282 244 218
Data processing expense 659 271 269
Regulatory services/fees 95 98 85
Other operating expense 1,423 1,495 1,524
-------------- --------------- --------------
Total non-interest expense $ 11,940 $ 10,760 $ 10,059
-------------- --------------- --------------
-------------- --------------- --------------
</TABLE>
Salaries and benefits have experienced increases over the past three
years as a result of the growth trends experienced at the Subsidiary Banks. 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 $1,376 in 1998 compared to
$990 in 1997.
A slight increase of $498 was recognized in non-interest expense other
than salaries and employee benefits, from $4,662 at December 31, 1997 to $5,160
at December 31, 1998. The increase in data processing expense and equipment
expense resulted from implementation of a new wide-area network along with
outsourcing data processing for Uptown National Bank of Chicago in 1998.
Management continues to focus on cost containment and this control of expenses
remains a priority as a part of our broader goal of maximizing long-term
profitability.
FORWARD LOOKING STATEMENTS
Statements made about the Company's future economic performance,
strategic plans or objectives, revenue or earnings projections, or other
financial items and similar statements are not guarantees of future performance,
but are forward looking statements. By their nature, these statements are
subject to numerous uncertainties that could cause actual results to differ
materially from those in the statements. Important factors that might cause the
Company's actual results to differ materially include, but are not limited to,
the following:
- Federal and state legislative and regulatory developments;
- Changes in management's estimate of the adequacy of the allowance for
loan losses (and/or other significant estimates such as OREO,
deferred tax valuation allowance, etc.);
- Changes in the level and direction of loan delinquencies and
write-offs;
- Interest rate movements and their impact on customer behavior and
Upbancorp's net interest margin;
- The impact of repricing and competitors' pricing initiatives on loan
and deposit products;
- Upbancorp's ability to adapt successfully to technological changes to
meet customers' needs and developments in the marketplace;
- Upbancorp's ability to access cost effective funding; and
- Economic conditions.
20
<PAGE>
YEAR 2000 COMPLIANCE
The Year 2000 will be the first century date change ever for an
automated society. For years, information systems were designed using two-digit
date fields. This practice has created an environment in which older generation
software programs may not be able to discern the difference between the year
2000 and the year 1900. This problem could result in the failure of computers
and/or information systems.
To manage this issue, the Subsidiary Banks have appointed Year 2000
project teams, headed by full-time project coordinators. The team members come
from all areas of the organization and have experience with the processes and
systems in use by the Subsidiary Banks.
The Subsidiary Banks software and hardware systems provide essential
support to all of their businesses. Failure to properly address Year 2000 issues
could result in an adverse effect on the daily operations and financial
performance of the Subsidiary Banks. Additionally, those on whom the Subsidiary
Banks rely or do business with could also adversely affect the organization if
they are not properly prepared. Given the number of possible scenarios, it is
virtually impossible to determine the potential cost of problems should the
Subsidiary Banks remediation efforts or the efforts of those with whom it does
business not be successful. In addition, should the Subsidiary Banks fail to
make satisfactory progress toward Year 2000 preparedness or not fully comply
with government agency mandated steps, actions could be taken by state or
federal regulators that would adversely affect the Subsidiary Banks business.
The project teams have employed a five-step plan to effectively deal
with all aspects of the Year 2000 issue. The first step is awareness, during
which the project was defined. This was followed closely by the assessment
phase, during which all software, hardware, equipment, physical plant issues,
and forms were inventoried and priority was assigned as to the importance in
overall operations. Items included in the physical plant inventory include HVAC
systems, security systems, vaults, and elevators among others.
The third step of the project plan is renovation. This step involves
making changes to existing items, elimination of unnecessary items, or
replacement of items. During early 1998, the Subsidiary Banks conducted a search
of processes to select a new core processing system. This provided the
Subsidiary Banks with the opportunity to review all options available and to
select a solution which would be Year 2000 compliant.
The fourth step of the Year 2000 project plan is validation, which
involves testing all mission critical systems. This phase is scheduled for
completion by March 31, 1999. Testing will continue throughout 1999 on
non-mission critical systems. The testing will be conducted on all systems even
those such as the core banking applications that were represented as being Year
2000 compliant when purchased. Any systems that have changes made after the
initial testing will be retested to ensure that they remain compliant.
The fifth step of the Subsidiary Banks' Year 2000 project plan is
implementation. This phase involves the review of test results by end users to
verify that performance is as expected.
The Subsidiary Banks have completed the awareness and the assessment
phases. The remaining three steps will be completed by March 31, 1999.
In addition to the five-step plan, the Subsidiary Banks have also
undertaken the challenge to review their customer bases and business suppliers
for compliance. Several approaches have been taken to achieve an understanding
of how well prepared these groups are. Questionnaires were sent to the
Subsidiary Banks' larger customers and suppliers. These questionnaires were
followed up with personal interviews when questionnaire responses did not
provide clear indications of the entities' preparedness. The Subsidiary Banks
cannot control the success of any given entity's preparations but are trying to
have
21
<PAGE>
as complete an understanding as possible about all aspects of their business.
The Subsidiary Banks have been simultaneously developing business
continuity plans to implement should problems arise. These plans will be
completed prior to June 30, 1999 and will be tested several times prior to the
end of 1999.
The Subsidiary Banks have also developed an education program in
conjunction with their Year 2000 efforts. The Subsidiary Banks have provided
mandatory training for all in-house personnel. They have also taken a leadership
role in educating their customers about the Year 2000 issues. Various direct
mailings have been sent to further educate the customers. In addition, one of
the Subsidiary Banks has organized a Year 2000 peer group to discuss issues at
hand on a monthly basis. It is important that the citizens of the communities
which the Subsidiary Banks serve understand what the Year 2000 issues are and
what plans and progress that individuals, businesses, and government agencies
are making to minimize any negative effects of Year 2000.
The estimated expense for the Company's Year 2000 efforts is expected
to range between $200 and $250. The cost of in-house personnel that performed
testing and other functions for the Year 2000 project plan is not included in
this estimate. These expenses have been incorporated in the Subsidiary Banks
operating budget for 1999. This is a complex issue and no assurances can be
given that compliance will be achieved without any unplanned outlays that would
affect future financial results.
22
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
UPBANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31, (Dollars in thousands) 1998 1997
- ------------------------------------------------ --------------------------------
<S> <C> <C>
ASSETS
Cash And due from banks $ 9,165 $ 6,678
Federal funds sold 10,000 500
Securities 42,379 47,621
Mortgages held-for-sale 4,067 2,146
Loans, net of allowance for loan loses of
$2,499 and $2,010 in 1998 and 1997 192,596 164,242
Premises and equipment, net 6,349 5,675
Accrued interest and other assets 4,906 4,515
----------- ----------
TOTAL ASSETS $ 269,462 $ 231,377
----------- ----------
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Demand deposits $ 47,062 $ 40,088
Savings, NOW and money market deposits 104,067 98,660
Other time deposits 74,905 59,384
----------- ----------
Total deposits 226,034 198,132
Borrowed funds 18,097 10,037
Accrued interest and other liabilities 2,693 2,208
----------- ----------
TOTAL LIABILITIES 246,824 210,377
----------- ----------
SHAREHOLDERS' EQUITY
Common stock $1 par value: 3,000,000 authorized:
1,000,000 issued in 1998 and 1997 1,000 1,000
Additional paid in capital 4,500 4,500
Retained earnings 18,823 16,961
Treasury stock - 130,004 in 1998 and 117,200 in 1997 (1,938) (1,480)
Accumulated other comprehensive income 253 19
----------- ----------
TOTAL SHAREHOLDERS' EQUITY 22,638 21,000
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 269,462 $ 231,377
----------- ----------
----------- ----------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
23
<PAGE>
Upbancorp, Inc.
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years ended December 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 16,730 $ 13,852 $ 11,293
Interest on mortgages held-for-sale 118 83 48
Interest on federal funds sold 437 401 451
Interest on investments:
Taxable 2,540 3,263 3,930
Non-taxable 215 123 83
---------------- --------------- ----------------
Total interest income 20,040 17,722 15,805
---------------- --------------- ----------------
INTEREST EXPENSE
Interest on savings, NOW, and money market deposits 2,670 2,577 2,307
Interest on other time deposits 3,630 3,158 2,674
Interest on borrowed funds 809 380 444
---------------- --------------- ----------------
Total interest expense 7,109 6,115 5,425
---------------- --------------- ----------------
NET INTEREST INCOME 12,931 11,607 10,380
PROVISION FOR LOAN LOSSES 580 410 914
---------------- --------------- ----------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 12,351 11,197 9,466
---------------- --------------- ----------------
NON-INTEREST INCOME
Service charges on deposit accounts 1,481 1,215 1,247
Mortgage banking fees 1,258 907 625
Other non-interest income 317 475 470
Net gains from sale of loans 126 177 203
Net loss on securities (28) (107) (105)
---------------- --------------- ----------------
Total non-interest income 3,154 2,667 2,440
---------------- --------------- ----------------
NON-INTEREST EXPENSE
Salaries and employee benefits 6,914 6,098 5,612
Net occupancy expense 647 680 514
Equipment expense 811 579 780
Outside fees and services 703 979 735
Advertising and business development expenses 406 316 322
Supplies expense 282 244 218
Data processing expense 659 271 269
Regulatory services/fees 95 98 85
Other operating expense 1,423 1,495 1,524
---------------- --------------- ----------------
Total non-interest expense 11,940 10,760 10,059
---------------- --------------- ----------------
INCOME BEFORE INCOME TAXES 3,565 3,104 1,847
Income taxes 1,265 1,127 693
---------------- --------------- ----------------
NET INCOME $ 2,300 $ 1,977 $ 1,154
---------------- --------------- ----------------
---------------- --------------- ----------------
Basic earnings per share $ 2.63 $ 2.24 $ 1.30
---------------- --------------- ----------------
---------------- --------------- ----------------
Weighted average shares outstanding 875,907 882,800 885,740
---------------- --------------- ----------------
---------------- --------------- ----------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
24
<PAGE>
UPBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years ended December 31, (DOLLARS IN THOUSANDS) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,300 $ 1,977 $ 1,154
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 580 410 914
Depreciation and amortization 1,107 965 929
Net loss on securities 28 107 105
Net gains on sale of mortgage loans (126) (177) (203)
Net gains on sale of other real estate owned (52) - (21)
Change in deferred income taxes (179) 171 163
Amortization on investment securities, net (118) (342) (326)
Originations of mortgages held-for-sale (77,169) (38,262) (25,627)
Proceeds from sales of mortgages held-for-sale 75,374 37,294 27,778
Changes in assets and liabilities:
Increase in accrued interest and other assets (289) (17) (52)
Increase (decrease) in accrued interest and other liabilities 485 532 (228)
------------------ ---------------------- ------------------
Net cash provided by operating activities 1,941 2,658 4,586
------------------ ---------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in federal funds sold (9,500) 9,050 (1,450)
Purchases of available-for-sale securities (23,853) (23,803) (34,786)
Proceeds from maturities and redemptions
of available-for-sale securities 15,330 27,319 22,236
Proceeds from sale of available-for-sale securities 14,239 16,150 12,386
Purchases of held-to-maturity securities - (200) -
Proceeds from maturities and
redemptions of held-to-maturity securities - - 415
Net increase in loans (28,934) (35,068) (21,149)
Purchases of premises and equipment (1,728) (1,097) (608)
Purchase of airplane financing division (460) - -
Proceeds from sale of other real estate 386 - 1,487
------------------ ---------------------- ------------------
Net cash used in investing activities (34,520) (7,649) (21,469)
------------------ ---------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in total deposits 27,902 2,830 14,529
Net increase (decrease) in borrowed funds 8,060 (524) 5,331
Cash dividends paid (438) (441) (443)
Purchase of treasury stock (458) - (86)
------------------ ---------------------- ------------------
Net cash provided by financing activities 35,066 1,865 19,331
------------------ ---------------------- ------------------
Net increase (decrease) in cash and due from banks 2,487 (3,126) 2,448
Cash and due from banks at beginning of period 6,678 9,804 7,356
------------------ ---------------------- ------------------
Cash and due from banks at end of period $ 9,165 $ 6,678 $ 9,804
------------------ ---------------------- ------------------
------------------ ---------------------- ------------------
Supplemental disclosure of cash flow information:
Cash payments: Interest $ 7,017 $ 5,936 $ 5,396
Income taxes 1,642 826 701
Supplemental schedule of non-cash investing activities:
Other real estate acquired in settlement of loans $ - $ - $ 457
------------------ ---------------------- ------------------
------------------ ---------------------- ------------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
25
<PAGE>
UPBANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Additional
Common Paid In Retained Treasury
Stock Capital Earnings Stock
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 1,000 $ 4,500 $ 14,714 $(1,394)
------------------ --------------- ----------------- -------------------
Comprehensive Income:
Net income 1,154
Net unrealized gain (loss) on securities
available-for-sale, net of tax of $(130)
Comprehensive Income
Cash dividends: $.50 per share (443)
Purchase of treasury stock (86)
------------------ --------------- ----------------- -------------------
BALANCE, DECEMBER 31, 1996 $ 1,000 $ 4,500 $ 15,425 $(1,480)
------------------ --------------- ----------------- -------------------
Comprehensive Income:
Net income 1,977
Net unrealized gain (loss) on securities
available-for-sale, net of tax of $388
Comprehensive Income
Cash dividends: $.50 per share (441)
------------------ --------------- ----------------- -------------------
BALANCE, DECEMBER 31, 1997 $ 1,000 $ 4,500 $ 16,961 $(1,480)
------------------ --------------- ----------------- -------------------
Comprehensive Income:
Net income 2,300
Net unrealized gain (loss) on securities
available-for-sale, net of tax of $149
Comprehensive Income
Cash dividends: $.50 per share (438)
Purchase of treasury stock (458)
------------------ --------------- ----------------- -------------------
BALANCE, DECEMBER 31, 1998 $ 1,000 $ 4,500 $ 18,823 $(1,938)
------------------ --------------- ----------------- -------------------
------------------ --------------- ----------------- -------------------
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income Total
--------------------------------------------------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1995 $ (386) $ 18,434
----------------------------- ------------------------
Comprehensive Income:
Net income 1,154
Net unrealized gain (loss) on securities
available-for-sale, net of tax of $(130) (203) (203)
------------------------
Comprehensive Income 951
------------------------
Cash dividends: $.50 per share (443)
Purchase of treasury stock (86)
----------------------------- ------------------------
BALANCE, DECEMBER 31, 1996 $ (589) $ 18,856
----------------------------- ------------------------
Comprehensive Income:
Net income 1,977
Net unrealized gain (loss) on securities
available-for-sale, net of tax of $388 608 608
------------------------
Comprehensive Income 2,585
------------------------
Cash dividends: $.50 per share (441)
----------------------------- ------------------------
BALANCE, DECEMBER 31, 1997 $ 19 $ 21,000
----------------------------- ------------------------
Comprehensive Income:
Net income 2,300
Net unrealized gain (loss) on securities
available-for-sale, net of tax of $149 234 234
------------------------
Comprehensive Income 2,534
------------------------
Cash dividends: $.50 per share (438)
Purchase of treasury stock (458)
----------------------------- ------------------------
BALANCE, DECEMBER 31, 1998 $ 253 $ 22,638
----------------------------- ------------------------
----------------------------- ------------------------
</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,
1998, 1997 and 1996
(Dollars in thousands, except per share data)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
Upbancorp, Inc. ("Upbancorp" or the "Company"), is a multi-bank holding
company, organized in 1983 under the laws of the State of Delaware. The Company
owns all of the outstanding common stock of Uptown National Bank of Chicago
("Uptown"), organized in 1929 and located in Chicago, Illinois, and Heritage
Bank ("Heritage"), organized in 1977 and located in Phoenix, Arizona. Upbancorp
does not engage in any activities other than providing administrative services
and acting as a holding company for its Subsidiary Banks.
The Company's affiliates consist of two full-service community banks,
which operate five banking offices and two loan production offices in northern
Chicago and metropolitan Phoenix. Both Subsidiary
26
<PAGE>
Banks are engaged in the general commercial banking business in addition to
offering a complete range of retail banking services. The Subsidiary Banks
conduct general banking business which embraces all of the usual 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 wholly-owned subsidiary, Broadway Clark Building Corporation
("BCBC"), is an Illinois corporation and owns all of the real estate that is
used in connection with the operation of Uptown's business with the exception of
two facilities.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Upbancorp
and its wholly-owned subsidiaries Uptown (including its wholly-owned subsidiary
BCBC) and Heritage after elimination of all intercompany balances and
transactions.
BASIS OF FINANCIAL STATEMENT PRESENTATION:
The accounting and reporting policies of the Company conform to
generally accepted accounting principles. In preparing the accompanying
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts in the consolidated financial
statements and the accompanying notes. Significant estimates which are
particularly susceptible to change in a short period of time include the
determination of the allowance for loan losses. Actual results could differ from
those estimates.
Effective January 1, 1998, the Company adopted Financial Accounting
Standards Board's Statement No. 130, which was issued in June 1997. Statement
No. 130 establishes new rules for the reporting and display of comprehensive
income and its components, but has no effect on the Company's net income or
total shareholders' equity. Statement No. 130 requires unrealized gains and
losses on the Company's available-for-sale securities which prior to adoption
were reported separately in shareholders' equity to be included in comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of Statement No. 130.
Effective January 1, 1998, the Company adopted Financial Accounting
Standards Board Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information". Statement No. 131 requires a publicly-held entity to
disclose financial and other descriptive information about all of its reportable
operating segments. The Statement requires disclosure of net income or loss,
certain specific revenue and expense items, and assets for each segment
presented and disclosure of a reconciliation of this information with the
corresponding amounts recognized in the financial statements of the entity. This
Statement also requires disclosure of other pertinent segment information,
including the products and services provided by its operating segments and the
method by which the operating segments were determined.
Based on the Company's approach to decision making, it has decided that
its business is comprised of a single segment and that Statement No. 131
therefore has no impact on its consolidated financial statements.
SECURITIES:
Securities classified as held-to-maturity are those debt securities for
which the Subsidiary Banks have both the positive intent and ability to hold to
maturity and are reported at amortized cost. Amortization of premiums and
accretion of discounts, computed by the interest method over their contractual
lives, is included in interest income.
27
<PAGE>
Securities classified as available-for-sale are those debt securities
that the Subsidiary Banks intend to hold for an indefinite period of time, but
not necessarily to maturity. Any decision to sell a security classified as
available-for-sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the Subsidiary
Bank's assets and liabilities, liquidity needs, regulatory capital
considerations, and other similar factors.
Securities available-for-sale are reported at fair value with
unrealized gains or losses reported as a separate component of other
comprehensive income net of the related deferred tax effect. The amortization of
premiums and accretion of discounts, computed by the interest method over their
contractual lives, are recognized in interest income.
Realized gains or losses, determined on the basis of the cost of
specific securities sold, are included in earnings.
Declines in the fair value of individual securities classified as
either held-to-maturity or available-for-sale below their amortized cost that
are determined to be other than temporary, result in write-downs of the
individual securities to their fair value with the resulting write-downs
included in current earnings as realized losses.
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 held 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 the
lower of cost or market for a period of up to ten days with interest income
recognized for that period. Mortgage banking fees are recorded at the date of
origination. For purposes of this report, mortgages held-for-sale and mortgage
banking fees relate only to these two types of mortgage activities; not to
mortgages which are originated, booked and serviced by the Company. All sales
are made without recourse.
LOANS AND ALLOWANCE FOR LOAN LOSSES:
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding unpaid principal balances reduced by any charge-offs or specific
valuation accounts and net of unearned discount, deferred loan fees and the
allowance for loan losses.
Loan origination and commitment fees are deferred and the net amount is
accreted as an adjustment of the loan yield over the contractual life of the
related loans. Commitment fees based upon a percentage of a customer's unused
line of credit and fees related to standby letters of credit are recognized over
the commitment period.
Unearned interest on discounted loans is accreted to income over the
life of the loans, using the sum-of-month's digits method which approximates the
level yield method. For all other loans, interest is accrued daily on the
outstanding balances. The accrual of interest is discontinued on loans past due
90 days or more. For impaired loans, accrual of interest is discontinued when
management believes, after considering collection efforts and other factors,
that the borrower's financial condition is such that collection of interest is
doubtful. Interest income on these loans is recognized to the extent interest
payments are received and the principal is considered fully collectible.
A loan is impaired when it is probable the Subsidiary Bank will be
unable to collect all contractual principal and interest payments due in
accordance with the terms of the loan agreement. Impaired loans are measured
based on the present value of expected future cash flows discounted at the
loan's effective
28
<PAGE>
interest rate or at the fair value of the collateral if the loan is collateral
dependent. When the measure of the impaired loan is less than the recorded
investment in the loan, the impairment, as well as any subsequent changes, is
recorded through a valuation allowance included in the allowance for loan
losses. The Company considers consumer loans and residential real estate loans
to be smaller homogeneous loans that are not considered as impaired loans. All
other loan types are accounted for as impaired loans when they meet the above
criteria.
The allowance for loan losses is established through a provision for
loan losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb estimated losses on existing loans, based on an evaluation of the
collectibility of loans and prior loss experience. This evaluation also takes
into consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrower's ability to pay. While
management uses the best information available to make its evaluation, future
adjustments to the allowance may be necessary if there are significant changes
in economic conditions. In addition, various regulatory agencies periodically
review the allowance for loan losses. These agencies may require the Banks to
make additions to the allowance for loan losses based on their judgments of
collectibility after reviewing the information available to them at the time of
their examination.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed principally by the straight-line method
over their estimated useful lives.
INTANGIBLE ASSETS:
Intangible assets consist of goodwill and other intangible assets which
are being amortized on a straight-line basis over estimated lives of 3 to 15
years. Intangible assets, net of accumulated amortization, are included in other
assets in the consolidated statements of condition.
INCOME TAXES:
The Company files a consolidated tax return with its subsidiaries. Its
share of the consolidated income tax provision is computed on a separate return
basis. Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
EARNINGS PER COMMON SHARE:
Basic earnings per share is computed by dividing net income for the
year by the average number of shares outstanding during the year. Dilutive
earnings per share do not differ from basic earnings per share.
STOCK SPLIT:
Effective October 20, 1998, the Company increased its authorized shares
of common stock from 300,000 to 3,000,000 and reduced the par value from $10 to
$1. In addition, the common stock was split on a four-to-one basis. All
references in the accompanying financial statements to number of shares and per
share amounts have been retroactively restated to reflect these changes.
29
<PAGE>
RECLASSIFICATIONS:
Certain amounts in the 1997 and 1996 consolidated financial statements
have been reclassified to conform with the 1998 presentation. Such
reclassifications have no effect on previously reported net income.
EMERGING ACCOUNTING STANDARDS:
In June 1998, The Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
is required to be adopted in years beginning after June 15, 1999. The Statement
permits early adoption as of the beginning of any fiscal quarter after its
issuance. The Company has not determined whether to adopt the new statement
early. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. Management does not believe that the adoption of
Statement No. 133 will have a material impact on the Company's financial
condition or results of operations.
The Financial Accounting Standards Board has issued Statement No. 134,
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise", which conforms
the subsequent accounting for securities retained after the securitization of
mortgage loans by a mortgage banking enterprise with the subsequent accounting
for securities retained after the securitization of other types of assets by a
nonmortgage banking enterprise. The Company does not securitize its mortgage
loans held for sale therefore Statement No.134 will have no impact. Statement
No. 134 is effective for the first fiscal quarter beginning after December 15,
1998.
NOTE 2. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Subsidiary Banks are required to maintain reserve balances in cash
or on deposit with the Federal Reserve Bank, based on a percentage of deposits.
The total of these reserve balances was approximately $2,047 and $1,880 at
December 31, 1998 and 1997.
NOTE 3. SECURITIES
The amortized cost and fair value of securities HELD-TO-MATURITY are as
follows at December 31:
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------- ----------------- --------------- --------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 200 $ - $ - $ 200
--------------------------- ----------------- --------------- --------------------
--------------------------- ----------------- --------------- --------------------
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------- ----------------- ---------------- -------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 200 $ 1 $ - $ 201
--------------------------- ----------------- ---------------- -------------------
--------------------------- ----------------- ---------------- -------------------
</TABLE>
30
<PAGE>
The amortized cost and fair value of securities HELD-TO-MATURITY at
December 31, 1998, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------------- --------------
<S> <C> <C>
Due in one year or less $ 200 $ 200
--------------- --------------
--------------- --------------
</TABLE>
The amortized cost and fair value of securities AVAILABLE-FOR-SALE are
as follows at December 31:
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------- ----------------- ------------------------ --------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ - $ - $ - $ -
U.S. Government agencies 25,494 242 - 25,736
States and political
subdivisions 5,757 208 26 5,939
Mortgage-backed securities 5,736 - 154 5,582
Other securities 4,778 144 - 4,922
------------------------- ----------------- ------------------------ --------------------
Total securities available-for-sale $ 41,765 $ 594 $ 180 $ 42,179
------------------------- ----------------- ------------------------ --------------------
------------------------- ----------------- ------------------------ --------------------
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------- ---------------- ------------------------ --------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 7,501 $ - $ 37 $ 7,464
U.S. Government agencies 17,453 100 6 17,547
States and political
subdivisions 3,589 147 - 3,736
Mortgage-backed securities 14,206 29 325 13,910
Other securities 4,641 125 2 4,764
------------------------- ---------------- ------------------------ --------------------
Total securities available-for-sale $ 47,390 $ 401 $ 370 $ 47,421
------------------------- ---------------- ------------------------ --------------------
------------------------- ---------------- ------------------------ --------------------
</TABLE>
The amortized cost and fair value of securities AVAILABLE-FOR-SALE at
December 31, 1998, by contractual maturity, are shown below. Expected maturities
in mortgage-backed securities may differ from contractual maturities because the
mortgages underlying the securities may be called or repaid with or without
prepayment penalties. Therefore, these securities are not included in the
maturity categories in the following maturity summary.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---------------------- ----------------------
<S> <C> <C>
Due in one year or less $ 386 $ 405
Due after one year through five years 20,821 21,062
Due after five years through ten years 6,696 6,777
Due after ten years 3,378 3,461
Equity securities 4,748 4,892
Mortgage-backed securities 5,736 5,582
---------------------- ----------------------
Total $41,765 $42,179
---------------------- ----------------------
---------------------- ----------------------
</TABLE>
31
<PAGE>
Gross gains realized were $15 in 1998, $19 in 1997 and $71 in 1996.
Gross losses realized were $43 in 1998, $126 in 1997 and $176 in 1996.
Investment securities carried at approximately $26,515 and $14,184 at
December 31, 1998 and 1997, respectively, were pledged to secure public and
trust deposits and for other purposes as required or permitted by law.
NOTE 4. LOANS
Major classifications of loans are as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
-------------------------- ------------------------
<S> <C> <C>
Commercial - Aircraft related $ 26,617 $ 17,846
Commercial - Other 33,395 30,361
Secured by real estate - Construction 22,365 9,440
Secured by real estate - Residential (1 to 4 family) 30,971 34,899
Secured by real estate - Residential (5 or more) 29,900 27,635
Secured by real estate - Non-residential 45,640 40,984
Consumer, net of unearned discount 6,207 5,087
-------------------------- ------------------------
Total loans 195,095 166,252
Less: Allowance for loan losses (2,499) (2,010)
-------------------------- ------------------------
Total loans, net of allowance for loan losses $ 192,596 $ 164,242
-------------------------- ------------------------
-------------------------- ------------------------
</TABLE>
Transactions in the allowance for loan losses account during the years
ended December 31, 1998, 1997 and 1996 are summarized below:
<TABLE>
December 31,
---------------------------------------------------------------
1998 1997 1996
------------------ ----------------------- ------------------
<S> <C> <C> <C>
Balance at beginning of year $ 2,010 $ 1,485 $ 1,402
Provision for loan losses 580 410 914
Loans charged-off (155) (28) (896)
Recoveries on loans previously charged-off 64 143 65
------------------ ----------------------- ------------------
Balance at end of year $ 2,499 $ 2,010 $ 1,485
------------------ ----------------------- ------------------
------------------ ----------------------- ------------------
</TABLE>
As of December 31, 1998 and 1997, 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>
1998 1997
---------------------------------------- -----------------------------------
Carrying Valuation Carrying Valuation
Value Allowance Value Allowance
-------------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Impaired loans
Valuation allowance required $ - $ - $ - $ -
No valuation allowance required 1,234 - 252 -
-------------------- ----------------- ----------------- ----------------
Total impaired loans $1,234 $ - $ 252 $ -
-------------------- ----------------- ----------------- ----------------
-------------------- ----------------- ----------------- ----------------
</TABLE>
32
<PAGE>
The valuation allowance is included in the allowance for loan losses on
the balance sheet. The average recorded investment in impaired loans for
years-ended December 31, 1998 and 1997, was $402 and $523, respectively. No
Interest income was recognized in 1998 and 1997 on impaired loans.
NOTE 5. PREMISES AND EQUIPMENT
The following is a summary of bank premises and equipment at December
31:
<TABLE>
<CAPTION>
1998 1997
-------------- -----------------
<S> <C> <C>
Land $ 1,106 $ 1,106
Buildings and improvements 12,474 11,666
Furniture, fixtures and equipment 7,318 6,500
-------------- -----------------
Total cost 20,898 19,272
Accumulated depreciation (14,549) (13,597)
-------------- -----------------
$ 6,349 $ 5,675
-------------- -----------------
-------------- -----------------
</TABLE>
Depreciation expense on premises and equipment totaled $1,054, $923,
and $887 for 1998, 1997 and 1996, respectively.
The buildings, in which the main facilities of each bank are located,
have stores and offices which are rented. Total rent received was $1,037, $974
and $952 in 1998, 1997 and 1996, respectively and is recorded as a reduction of
net occupancy expense.
NOTE 6. OTHER TIME DEPOSITS
The aggregate amount of certificates of deposits of $100 or more
totaled $19,884 and $14,975 at December 31, 1998 and 1997.
Maturities of other time deposits are summarized as follows at December
31:
<TABLE>
<CAPTION>
1998
------------
<S> <C>
1999 $ 58,056
2000 9,014
2001 5,359
2002 524
2003 1,952
Thereafter -
------------
$ 74,905
------------
------------
</TABLE>
33
<PAGE>
NOTE 7. BORROWED FUNDS
At December 31, 1998 and 1997, borrowed funds consisted of:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Federal Home Loan Bank borrowing, due October 3, 2008, fixed rate $ 5,000 $ -
Federal Home Loan Bank borrowing, due January 20, 2008, fixed rate 5,000 -
Federal Home Loan Bank borrowing, due July 1, 2000, variable rate 4,000 -
Federal Home Loan Bank borrowing, due July 25, 2003, variable rate 4,000 -
Federal Home Loan Bank borrowing, due July 1, 1998, variable rate - 5,000
Federal Home Loan Bank borrowing, due October 3, 1998, fixed rate - 3,000
Federal funds purchased - 1,000
Securities sold under agreements to repurchase and
U.S. Treasury tax and loan note accounts 97 1,037
------------ ------------
Total $ 18,097 $ 10,037
------------ ------------
------------ ------------
</TABLE>
Uptown has an arrangement with the Federal Home Loan Bank of Chicago
whereby the FHLB will make advances to the Bank with repayment terms from
overnight to ten years. The Bank is eligible to obtain credit up to 20 times the
member Bank's holding of Federal Home Loan Capital Stock; these eligible
borrowings amount to $18,000. As required under the agreement, the advances can
be collateralized by the following: qualifying 1-4 family first mortgages,
private mortgage-backed securities or U.S. Treasury and Agency obligations.
Uptown has pledged a combination of U.S. Treasury and Agency mortgage-backed
securities.
NOTE 8. PENSION PLAN
Uptown has a defined benefit plan covering substantially all employees
in the Company. The plan is based on years of service and the employee's average
compensation during all years of employment. The Company's funding policy is to
meet the minimum funding requirements set forth in the Employee Retirement
Income Security Act of 1974 ("ERISA"), plus additional amounts as appropriate.
In addition, the Company adopted a Supplemental Executive Retirement Plan (the
"SERP") for certain executive officers, effective February 17, 1998.
During the year ended December 31, 1998, the Company adopted Statement
of Financial Accounting Standards No. 132, "EMPLOYER'S DISCLOSURES ABOUT
PENSIONS AND OTHER POSTRETIREMENT BENEFITS - AN AMENDMENT OF SFAS NO. 87, 88 AND
106" (SFAS 132). SFAS 132 revises employer's disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans. Prior period disclosures have been restated.
34
<PAGE>
The following table provides a reconciliation of the changes in the Plans'
benefit obligations and fair value of assets over the two year period ended
December 31, 1998 and a statement of the Plans' funded status as of December 31
of both years:
<TABLE>
<CAPTION>
Pension Benefits
Amounts in ($000) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of benefit obligation:
Net obligation at beginning of the year 5,546 4,577
Service cost 307 249
Interest cost 446 377
Plan amendments 658 267
Actuarial (gain) loss 587 368
Gross Benefits paid (313) (292)
----- -----
Net obligation at end of the year 7,231 5,546
----- -----
----- -----
Reconciliation of fair value of plan assets:
Fair value of plan assets at beginning year 7,845 6,402
Actual return on plan assets 392 1,735
Gross benefits paid (313) (292)
----- -----
Fair value of plan assets at end of the year 7,924 7,845
----- -----
----- -----
Funded status:
Funded status at end of the year 693 2,299
Unrecognized transition (asset) obligation - (53)
Unrecognized prior service cost 715 126
Actuarial gain/(loss) 13 (841)
----- -----
Net amount recognized 1,421 1,531
----- -----
----- -----
</TABLE>
The net amount recognized is recorded in the financial statements with $1,555 in
other assets and $134 in other liabilities.
As of December 31, 1998, the benefit obligations of the defined benefit plan and
the SERP were $6,442 and $789, respectively, and the fair value of plan assets
of the defined benefit plan and the SERP were $7,924 and $-0-, respectively.
The following table provides the components of net periodic benefit cost for the
plans fiscal years 1998 and 1997:
<TABLE>
<CAPTION>
Pension Benefits
Amounts in ($000) 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Service cost 307 249
Interest cost 446 377
Expected return on plan assets (654) (532)
Amortization of transition obligation (asset) (53) (133)
Amortization of prior service cost 70 6
Actuarial gain(loss) (6) -
------- ------
Net periodic benefit cost 110 (33)
------- ------
------- ------
</TABLE>
The assumptions used in the measurement of the Company's benefit obligation are
shown in the following table:
<TABLE>
<CAPTION>
Pension Benefits
1998 1997
-----------------------
<S> <C> <C>
Weighted average assumptions as of December 31:
Discount rate 6.50% 7.00%
Expected return on plan assets 8.50% 8.50%
Rate of compensation increase 5.00% 4.50%
</TABLE>
35
<PAGE>
NOTE 9. INCOME TAXES
The provision for income taxes for the years ended December 31, 1998,
1997 and 1996 is comprised of the following amounts:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- -------------- --------------
<S> <C> <C> <C>
Current:
Federal $ 1,289 $ 827 $ 470
State 155 129 60
Deferred: (179) 171 163
-------- -------- -------
Total tax provision $ 1,265 $ 1,127 $ 693
-------- -------- -------
-------- -------- -------
</TABLE>
The components of the net deferred tax assets which are included in
other assets, are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
<S> <C> <C>
Deferred Tax Assets
Allowance for loan losses and other real estate owned $ 570 $ 388
Depreciation 603 535
Interest on non-accrual loans 26 129
Deferred loan fees 8 14
-------------- -------------
Gross deferred tax assets 1,207 1,066
-------------- -------------
Deferred Tax Liabilities
Pension expense 646 680
Discount accretion 32 45
Securities available-for-sale 161 12
Other 43 34
-------------- -------------
Gross deferred tax liabilities 882 771
-------------- -------------
Net deferred tax assets $ 325 $ 295
-------------- -------------
-------------- -------------
</TABLE>
Management has determined that a valuation allowance is not required at
December 31, 1998 and 1997.
The following table reconciles the statutory Federal income tax rate
with the effective income tax as a percent of pretax income.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Federal income tax as statutory rate 35.0% 35.0% 35.0%
Tax-exempt interest (3.4)% (2.4)% (2.2)%
Graduated tax rate (1.0)% (1.0)% (1.0)%
State tax 2.9% 2.8% 2.1%
Other, net 2.0% 1.9% 3.6%
----------- ----------- -----------
Effective income tax rate 35.5% 36.3% 37.5%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
NOTE 10. RELATED PARTIES
The Subsidiary Banks have entered into transactions with their
directors and their affiliates (related parties). The aggregate amount of loans
to such related parties at December 31, 1998 and 1997 was $2,805 and $5,304,
respectively. These loans were made using the same criteria and at interest
rates and terms that
36
<PAGE>
would be comparable to loans granted to a borrower who is not an executive
officer or director. During 1998, new loans and advances to such related parties
amounted to $3,118 and repayments amounted to $5,617.
NOTE 11. COMMITMENTS, CONTINGENCIES AND CREDIT RISK
The Banks are parties to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of their
customers. These financial instruments include commitments to extend credit and
standby letters of credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the balance sheet.
The contract amounts of these instruments reflect the extent of involvement a
bank has in particular classes of financial instruments.
The Banks' exposure to credit loss in the event of nonperformance by
the other party for commitments to extend credit and standby and commercial
letters of credit is presented by the contractual amount of those instruments.
The Banks use the same credit policies in making commitments and conditional
obligations as they do for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Banks evaluate each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Banks upon an extension of credit is based on
management's credit evaluation of the customer. Collateral held varies but may
include accounts receivable, marketable securities, inventory, property, plant,
and equipment, and income-producing commercial properties and residential
properties.
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.
<TABLE>
<CAPTION>
Contract Amount
---------------------------------
Off - balance sheet assets 1998 1997
-------------- --------------
<S> <C> <C>
Commitments to extend credit $ 68,792 $ 56,074
Letters of credit:
Standby 340 568
Commercial 1,149 680
</TABLE>
Upbancorp leases certain office facilities under various operating
lease agreements that provide for payment of taxes, insurance and maintenance
costs. These leases generally include renewal options. The future minimum rental
commitments at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Premises
----------------
<S> <C>
1999 $ 201
2000 214
2001 192
2002 197
2003 119
----------
Total minimum payments $ 924
----------
----------
</TABLE>
37
<PAGE>
In the ordinary course of business, the Banks have various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company and its
Subsidiary Banks are defendants in certain claims and legal actions arising in
the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material adverse effect on the consolidated financial
condition of the Company.
In addition to financial instruments with off-balance-sheet risk, the
Company, to a certain extent, is exposed to varying risks associated with
concentrations of credit. Concentrations of credit risk generally exist if a
number of counterparties are engaged in similar economic characteristics that
would cause their ability to meet contractual obligations to be similarly
affected by economic or other conditions.
The Company conducts substantially all of its lending activities
throughout northeastern Illinois and the greater Phoenix metropolitan area. As
of December 31, 1998, loans to customers in Arizona were approximately $57
million. Loans granted to businesses are primarily secured by business assets,
owner-occupied real estate or personal assets of commercial borrowers. Loans to
individuals are primarily secured by automobiles, residential real estate or
other personal assets. Since the Company's borrowers and its loan collateral
have geographic concentration in the greater Chicago and greater Phoenix
metropolitan areas, the Company could have exposure to a decline in those local
economies and real estate markets. However, management believes that the
diversity of its customer base and local economies, its knowledge of the local
markets, and its proximity to customers limits the risk of exposure to adverse
economic conditions.
As of December 31, 1998, the Company's loan portfolio included $26,617
of loans secured by aircraft. Credit losses arising from aircraft loans compare
favorably with the Company's credit loss experience on its loan portfolio as a
whole.
NOTE 12. RESTRICTIONS ON RETAINED EARNINGS
Uptown and Heritage are subject to certain restrictions on the amount
of dividends that they may declare without prior regulatory approval. At
December 31, 1998, no retained earnings of Uptown were available for dividend
declaration without prior regulatory approval. Under the provisions of the
Arizona Bank Code, dividends may not be declared unless they are made in
compliance within the banking laws of Arizona.
NOTE 13. REGULATORY MATTERS
The Company and the Banks are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can cause regulators to initiate certain mandatory
- - and possibly additional discretionary - action that, if undertaken could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Banks must meet specific capital guidelines that involve
quantitative measures of the Company's and the Banks' assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company's and the Banks' capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Banks to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes the Company and the Banks meet all
capital adequacy requirements to which they are subject to at December 31, 1998.
At December 31, 1998, all entities exceeded regulatory established
minimums as defined for financial institutions. To be categorized as adequately
capitalized, the Banks must maintain minimum total risk-based, Tier 1 risk
based, and Tier 1 leverage ratios as set forth in the table below. As of
year-end,
38
<PAGE>
Heritage Bank exceeded regulatory established capital minimums, however, did not
exceed the category for "well" capitalized institutions. As a result, the Bank
may not accept brokered deposits without prior approval from the regulatory
authorities. As a matter of fact, the Bank does not accept brokered deposits.
There are no conditions or events since that notification that management
believes have changed the Banks' category.
The Company's ratios are presented in the following table:
<TABLE>
<CAPTION>
To be well
For capital capitalized under
adequacy prompt corrective
Actual purposes action provisions
----------------------------------------------------------------------
AS OF DECEMBER 31, 1998: Amount Ratio Amount Ratio Amount Ratio
- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to risk-weighted assets)
Consolidated $24,244 11.9% $ 16,302 8.0% $ -- --
Uptown National Bank 17,171 11.8% 11,611 8.0% 14,513 10.0%
Heritage Bank 5,255 8.9% 4,721 8.0% 5,901 10.0%
Tier 1 Capital (to risk-weighted assets)
Consolidated 21,745 10.6% 8,151 4.0% -- --
Uptown National Bank 15,356 10.6% 5,806 4.0% 8,708 6.0%
Heritage Bank 4,654 7.9% 2,361 4.0% 3,541 6.0%
Leverage (Tier 1 to average assets)
Consolidated 21,745 8.2% 10,594 4.0% -- --
Uptown National Bank 15,356 7.6% 8,109 4.0% 10,136 5.0%
Heritage Bank 4,654 7.3% 2,536 4.0% 3,170 5.0%
AS OF DECEMBER 31, 1997:
- ------------------------
Total Capital (to risk-weighted assets)
Consolidated $22,758 13.7% $ 13,260 8.0% $ -- --
Uptown National Bank 17,315 14.3% 9,716 8.0% 12,146 10.0%
Heritage Bank 4,634 10.2% 3,634 8.0% 4,543 10.0%
Tier 1 Capital (to risk-weighted assets)
Consolidated 23,748 12.5% 6,630 4.0% -- --
Uptown National Bank 15,805 13.0% 4,858 4.0% 7,287 6.0%
Heritage Bank 4,134 9.1% 1,817 4.0% 2,726 6.0%
Leverage (Tier 1 to average assets)
Consolidated 23,748 9.0% 9,277 4.0% -- --
Uptown National Bank 15,805 8.6% 7,352 4.0% 9,190 5.0%
Heritage Bank 4,134 8.3% 1,992 4.0% 2,490 5.0%
</TABLE>
NOTE 14. FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used by the Company in
estimating its fair value of its financial instruments:
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD: The carrying amounts
reported in the balance sheet for cash and due from banks and federal
funds sold approximate their fair values.
39
<PAGE>
SECURITIES HELD-TO-MATURITY AND AVAILABLE-FOR-SALE: Fair values of
securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
LOANS AND MORTGAGES HELD-FOR-SALE: The fair values of the loan
portfolio are estimated based upon discounted cash flow analyses that
apply using interest rates currently being offered for loans with
similar terms to borrowers with similar credit quality.
DEPOSIT LIABILITIES: The fair values disclosed for deposits with no
defined maturities is equal to their carrying amounts which represent
the amount payable on demand. The carrying amounts for variable-rate,
fixed-term money market accounts and certificates of deposit
approximate their fair value at the reporting date. Fair values for
fixed rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
BORROWED FUNDS: The carrying amounts of borrowings under repurchase
agreements and other short-term borrowings approximate their fair
values.
ACCRUED INTEREST: The carrying amounts of accrued interest approximate
their fair values.
OFF-BALANCE SHEET INSTRUMENTS: Fair values for the Company's
off-balance sheet lending commitments (letters of credit and
commitments to extend credit) are based on fees currently charged to
enter into similar agreements, taking into account the remaining terms
of the agreements and the counterparties' credit standing. The fair
value for such commitments is nominal.
The estimated fair values of the Company's financial instruments were
as follows at December 31,
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks $ 9,165 $ 9,165 $ 6,678 $ 6,678
Federal fund sold 10,000 10,000 500 500
Securities available-for-sale 42,179 42,179 47,421 47,421
Securities held-to-maturity 200 200 200 201
Loans, net of unearned discount and
mortgages held-for-sale 198,562 205,482 166,388 163,723
Accrued interest receivable 1,632 1,632 1,439 1,439
FINANCIAL LIABILITIES
Deposits $ 226,034 $ 229,750 $ 198,132 $ 198,240
Borrowed funds 18,097 18,097 10,037 10,037
Accrued interest payable 862 862 770 770
</TABLE>
40
<PAGE>
NOTE 15. UPBANCORP, INC. - PARENT ONLY
FINANCIAL STATEMENTS
The Parent Company's condensed financial information, which follows, conforms
with the accounting policies described in the preceding notes:
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 1,739 $ 862
Investment in subsidiary banks 20,903 20,191
Other 206 140
-------------- --------------
TOTAL ASSETS $ 22,848 $ 21,193
-------------- --------------
-------------- --------------
LIABILITIES
Dividend declared $ 109 $ 110
Other liabilities 101 83
-------------- --------------
TOTAL LIABILITIES 210 193
-------------- --------------
SHAREHOLDERS' EQUITY
Common stock - $1 par value 1,000 1,000
Additional paid in capital 4,500 4,500
Retained earnings 18,823 16,961
Treasury stock (1,938) (1,480)
Accumulated other comprehensive income 253 19
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY $ 22,638 $ 21,000
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 22,848 $ 21,193
-------------- --------------
-------------- --------------
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended December 31, (DOLLARS IN THOUSANDS) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends received from
bank subsidiaries $ 2,151 $ 1,736 $ 1,411
Interest on short term investments 18 25 9
----------- ----------- -------------
Total Income 2,169 1,761 1,420
----------- ----------- -------------
EXPENSE
Salaries and employee benefits 365 435 333
Other expense 187 132 122
----------- ----------- -------------
Total Expense 552 567 455
----------- ----------- -------------
INCOME BEFORE INCOME TAXES AND
UNDISTRIBUTED INCOME OF SUBSIDIARIES 1,617 1,194 965
Income tax benefit 205 140 112
----------- ----------- -------------
INCOME BEFORE UNDISTRIBUTED INCOME
OF SUBSIDIARIES 1,822 1,334 1,077
Undistributed income of subsidiaries 478 643 77
----------- ----------- -------------
NET INCOME $ 2,300 $ 1,977 $ 1,154
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
41
<PAGE>
NOTE 15. UPBANCORP, INC. - PARENT ONLY
FINANCIAL STATEMENTS
(Continued)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31, (Dollars in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,300 $ 1,977 $ 1,154
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Equity in undistributed (income) loss of subsidiaries (478) (643) (77)
Accretion on U.S. Treasury Bills -- (10) --
Other, net (49) 88 (57)
------- ------ -------
Net cash provided by (used in) operating activities 1,773 1,412 1,020
------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital infusion to subsidiary -- (500) (250)
Purchases of U.S. Treasury Bills -- (738) --
Maturities of U.S. Treasury Bills -- 748 --
------- ------ -------
Net cash provided by (used in) investing activities -- (490) (250)
------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (438) (441) (443)
Treasury stock purchased (458) -- (86)
------- ------ -------
Net cash used in financing activities (896) (441) (529)
------- ------ -------
Net increase in cash 877 481 241
Cash at beginning of year 862 381 140
------- ------ -------
Cash at end of year $ 1,739 $ 862 $ 381
------- ------ -------
------- ------ -------
</TABLE>
42
<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.
Management depends upon the Company's system of internal controls in
meeting its responsibilities for reliable financial statements. This system is
designed to provide reasonable assurance that assets are safeguarded and that
transactions are properly recorded and executed in accordance with Management's
authorization. Judgments are required to assess and balance the relative cost
and the expected benefits of these controls. As an integral part of the system
of internal controls, the Bank Subsidiaries contract with a professional staff
of Independent Internal Auditors who conduct operational, financial, and special
audits, and coordinate audit coverage with the Independent Auditors.
The consolidated financial statements have been audited by our
Independent Auditors, McGladrey & Pullen LLP, who render an independent
professional opinion on Management's financial statements.
The Audit Committee of Upbancorp, Inc.'s Board of Directors, composed
solely of outside directors, meets regularly with the Independent Internal
Auditors, the Independent Auditors and Management to assess the scope of the
annual examination plan and to discuss audit, internal control and financial
reporting issues, including major changes in accounting policies and reporting
practices. The Independent Internal Auditors and the Independent Auditors have
free access to the Audit Committee, without Management present, to discuss the
results of their audit work and their evaluations of the adequacy of internal
controls and the quality of financial reporting.
Sincerely,
/s/ Richard K. Ostrom
- -------------------------------------
Richard K. Ostrom
Chairman of the Board
President and Chief Executive Officer
/s/ Kathleen L. Harris
- -------------------------------------
Kathleen L. Harris
Vice President & Chief Financial Officer
43
<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. and subsidiaries as of December 31, 1998 and 1997 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, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Upbancorp, Inc. and
subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen LLP
-----------------------------
McGladrey & Pullen LLP
Schaumburg, Illinois
March 9, 1999
44
<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 1999 Annual Meeting of Shareholders of
the Company to be held on April 13, 1999, 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 1999 Annual Meeting of Shareholders of the Company to be held
on April 13, 1999, 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 1999 Annual
Meeting of Shareholders of the Company to be held on April 13, 1999, 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 1999 Annual Meeting of Shareholders of
the Company to be held on April 13, 1999, which is incorporated herein by
reference. Further information with respect to loans to the Directors and
Executive Officers of the Company is provided in Note 10 in the Notes to
Consolidated Financial Statements found in Item 8 of this Form 10-K.
45
<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, 1998 and 1997
Consolidated Statements of Income - Years ended December 31, 1998, 1997
and 1996
Consolidated Statements of Cash Flows - Years ended December 31, 1998,
1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity - Years
ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
FINANCIAL STATEMENT SCHEDULES
All schedules normally required by Form 10-K are omitted since they are
either not applicable or the required information is shown in the
financial statements or notes thereto.
EXHIBITS
(3) Amended Certificate of Incorporation is attached hereto as Exhibit A
and by-laws (filed as an Exhibit to the Registrant's Form S-14 Number
2-18746 filed with the Securities and Exchange Commission on February
8, 1983 and incorporated herein by reference).
(10.1) Employment Agreement between Upbancorp, Inc. and Richard K. Ostrom is
attached hereto as Exhibit B. Employment Agreement between Heritage
Bank, Upbancorp, Inc. and John E. Fahrendorf, Jr. is attached hereto as
Exhibit C. Employment Agreement between Uptown National Bank of
Chicago, Upbancorp, Inc. and Robert P. Griffiths is attached hereto as
Exhibit D.
(10.2) Indemnity Agreement between Upbancorp, Inc. and its Directors and
Officers (filed as an Exhibit to the Registrant's 1992 Form 10-K and
incorporated herein by reference).
(22) Subsidiaries of the Registrant (see Item 1 which contains this
information).
(27.1) Financial Data Schedule.
(28) Proxy Statement for the 1999 Annual Meeting (filed with the Securities
and Exchange Commission on March 22, 1999 and incorporated herein by
reference).
(b) REPORTS ON FORM 8-K - No reports on Form 8-K were filed during the
fourth quarter of 1998.
46
<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: March 9, 1999 UPBANCORP, INC.
---------------------
(The Registrant)
/s/ Richard K. Ostrom
---------------------
Richard K. Ostrom
Chairman of the Board,
President and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THEIR CAPACITIES ON MARCH 9, 1999.
<TABLE>
<S> <C> <C>
/s/ Richard K. Ostrom Chairman of the Board March 9, 1999
- ------------------------------------------------------
Richard K. Ostrom
/s/ Stephen W. Edwards, CLU Director March 9, 1999
- ------------------------------------------------------
Stephen W. Edwards, CLU
/s/ Delbert R. Ellis Director March 9, 1999
- ------------------------------------------------------
Delbert R. Ellis
/s/ John E. Fahrendorf, Jr. Director March 9, 1999
- ------------------------------------------------------
John E. Fahrendorf, Jr.
/s/ Robert P. Griffiths Director March 9, 1999
- ------------------------------------------------------
Robert P. Griffiths
/s/ Alfred E. Hackbarth, Jr. Director March 9, 1999
- ------------------------------------------------------
Alfred E. Hackbarth, Jr.
/s/ James E. Heraty Director March 9, 1999
- ------------------------------------------------------
James E. Heraty
/s/ Marvin L. Kocian Director March 9, 1999
- ------------------------------------------------------
Marvin L. Kocian
</TABLE>
47
<PAGE>
EXHIBIT A
STATE OF DELAWARE
PAGE 1
OFFICE OF THE SECRETARY OF STATE
---------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT
OF "UPBANCORP, INC.", FILED IN THIS OFFICE ON THE TWENTY-SECOND DAY OF OCTOBER,
A.D. 1998, AT 1:35 O'CLOCK P.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS.
[SEAL]
/s/ Edward J. Freel
----------------------------------------
EDWARD J. FREEL, SECRETARY OF STATE
0950514 8100 AUTHENTICATION: 9367736
981407841 DATE: 10-22-98
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
UPBANCORP, INC.
It is hereby certified that:
1. The name of the Corporation (hereinafter called the "Corporation") is:
UPBANCORP, INC.
2. The first paragraph of Article IV of the Certificate of Incorporation
of the Corporation is hereby amended to read as follows:
"The total number of shares of stock which the corporation shall have
authority to issue is Three Million (3,000,000) shares of Common
Stock, $1.00 par value per share."
3. This Amendment to the Certificate of Incorporation herein certified
has been duly adopted in accordance with the applicable provisions of Section
242 of the General Corporation Law of the State of Delaware, as amended.
IN WITNESS WHEREOF, this Certificate of Amendment to the Certificate of
Incorporation has been signed by the President and attested by the Secretary of
Upbancorp, Inc., as of the 20 day of October, 1998.
/s/ Richard K. Ostrom
-----------------------------------
Richard K. Ostrom, President
ATTEST:
/s/ Marvin L. Kocian
- -----------------------------------
Marvin L. Kocian, Secretary
<PAGE>
EXHIBIT B
EXECUTIVE EMPLOYMENT AGREEMENT
This Agreement is made as of the first day of January, 1997, between
Upbancorp, Inc., a Delaware corporation, (Upbancorp), and Richard K. Ostrom
(Ostrom).
Ostrom has served Upbancorp well and favorably since it was
incorporated and served Uptown National Bank of Chicago (Uptown), one of its
subsidiaries, approximately thirty-four years and is now President and Chief
Executive Officer of Upbancorp and Chairman and Chief Executive Officer of
Uptown. The principal business of Upbancorp is the banking business of Uptown
and Heritage Bank, Phoenix, Arizona (Heritage), its wholly owned subsidiaries.
Ostrom is also Chairman of the latter bank. Upbancorp desires to be assured of
Ostrom's continued valuable services as hereinafter provided.
Ostrom has been serving Upbancorp, Uptown and Heritage under a
contract dated January 1, 1992, which terminated December 31, 1996. The
prior contract was principally with Uptown but Ostrom has been providing
oversight and executive services to Heritage and Upbancorp believes Ostrom
should be Upbancorp's employee with assigned responsibilities to both
subsidiaries. Upbancorp further desires to have Ostrom's services at least
for a period of five years from date hereof.
In consideration of the foregoing and the mutual covenants herein
contained, it is agreed between the parties hereto as follows:
<PAGE>
1. Upbancorp shall employ Ostrom on a full-time basis and Ostrom
shall serve Upbancorp on a full-time basis until December 31, 2001, provided,
however, such period of employment on a full-time basis may be extended from
time to time by mutual written consent of Upbancorp and Ostrom. Said employment
on a full-time basis is hereinafter referred to as the "employment period".
During the employment period, Ostrom shall serve Upbancorp in an executive
capacity with such duties as may reasonably be assigned to him from time to time
by the Board of Directors of Upbancorp and he shall devote his full time and
attention during usual business hours exclusively to the business of Upbancorp
except during usual vacation periods. Until further action of the Board of
Directors of Upbancorp, Ostrom shall continue in his present capacity as
President and Chief Executive Officer of Upbancorp, Chairman and Chief Executive
Officer of Uptown and as Chairman of Heritage.
2. During the employment period Upbancorp shall pay to Ostrom
compensation at the base rate of Two Hundred Twenty-Five Thousand Dollars
($225,000) per annum beginning calendar year 1997, $150,000 of which
compensation shall be payable in equal monthly installments. The balance,
$75,000, shall accrue monthly and be paid quarterly in the final month of each
quarter upon mutually agreeable dates.
3. During the employment period, Ostrom shall be entitled to
participate in any supplemental compensation plan for executives of the
corporation, in the pension plan maintained for employees of Upbancorp, Inc., in
any profit sharing or similar
- 2 -
<PAGE>
plan (ESOP, 401K, etc.), long-term disability plan and any other incentive or
benefit plan (stock option plan, etc.) maintained for employees or executives.
Upbancorp will arrange for Ostrom to participate in any such plans.
4. During the employment period Ostrom shall be provided with a
luxury class automobile of his choice. This automobile will be provided by
Uptown at the direction of Upbancorp. Ostrom will pay an agreed upon rate for
personal usage of the vehicle. All expense shall be borne by Uptown. At any
time after three years after any vehicle acquired after the date of this
contract or the prior contract between Uptown and Ostrom has been placed in
service, Uptown shall at Ostrom's option provide Ostrom with a replacement
luxury class vehicle of his choice and allow Ostrom to acquire the original
vehicle for a reasonable consideration. Upon Ostrom's retirement or termination
under the provisions of Section 10 below, he shall be permitted to acquire his
then provided vehicle upon the same terms as above.
5. During the employment period, Upbancorp shall cause Uptown to
provide Ostrom with life insurance on the same basis provided Uptown employees.
Further, Ostrom's coverage shall not be less than the coverage provided him in
1988.
6. During his employment period, Upbancorp shall cause Uptown, in
addition to the life insurance provided for Ostrom under paragraph 5 above, to
provide Ostrom five hundred thousand dollars in coverage under a split dollar
arrangement whereby Uptown is assigned the cash value of the policy to the
extent of the premiums paid by Uptown and Ostrom owns all other rights in
- 3 -
<PAGE>
the policy. Ostrom's obligation under the arrangement shall be to pay the
annual cost of the policy as if the policy were a term policy, and Uptown shall
pay the balance of premiums. Ostrom shall be entitled to receive each year a
bonus in sufficient amount and at such time that he will have the necessary
funds to pay his required cost amount. Upon termination of employment, Ostrom
shall be afforded the right to continue the plan upon payment to Uptown of the
amount it has contributed to the payment of the premiums. Reasonable
arrangements shall be made to continue the insurance coverage in the case of
Ostrom's disability.
7. During the employment period and after the employment period
during retirement, unless Ostrom leaves employment pursuant to the provisions of
Section 10 hereof, Upbancorp shall cause Uptown to provide him with complete
medical and dental coverage at no cost to Ostrom, said coverage to be the same
or equivalent to the coverage provided other Uptown executive employees.
Coverage in retirement shall be reduced by any coverage Ostrom then has under
any public medical plan such as Medicare. Medical and dental coverage as
provided herein shall include Ostrom's spouse, provided she does not have
coverage available to her from any other source including Medicare.
8. During the employment period Ostrom shall be required to belong
to two Chicago area clubs, one of which shall be a golf club and the other a
dining or in town athletic club. The choice of clubs shall be Ostrom's and they
shall be primarily chosen for business purposes. The cost of said clubs shall
be
- 4 -
<PAGE>
borne by Uptown and Ostrom shall reimburse Uptown for any strictly personal
charges incurred. Upon Ostrom's termination of employment hereunder, he shall
be allowed to continue membership in said clubs but at his expense. He shall
not be required to reimburse Uptown for any dues, assessments or initial
membership fees.
9. Ostrom agrees that for a period of one (1) year immediately
following the termination of his employment with Upbancorp he will not directly
or indirectly render services within the geographical area having a radius of
ten (10) miles from the principal office of Upbancorp or any of its
subsidiaries, except for the central loop area of Chicago, in an executive
management capacity similar to those he now renders Upbancorp or Uptown as
President or Chairman and Chief Executive Officer to or for any financial
business in competition with Upbancorp.
10. If any one of the following occur while Ostrom is employed by
Upbancorp, and this Agreement is in effect, to wit:
(a) a "change in control" of Upbancorp which is required to be
reported to the Securities and Exchange Commission and/or the Office of the
Comptroller of the Currency and/or the Federal Reserve Board;
(b) 30% or more of the then outstanding voting securities of
Upbancorp are acquired or controlled by one person, group or entity; or
(c) during any two (2) consecutive years the members of its
Board of Directors sitting at the beginning of that period cease to be a
majority (unless the newly elected Directors were nominated by at least
two-thirds of the members sitting at
- 5 -
<PAGE>
the beginning of that period);
(d) Upbancorp or Uptown is sold, merged or consolidated with
another bank holding company or bank;
and if within three (3) years after the happening of any one of
those four (4) events (notwithstanding that the term of this Agreement may have
expired), Ostrom's employment is terminated then, unless any provision of
Section 13 hereof applies, Upbancorp agrees to:
(aa) continue his salary payable by the terms provided above, for
the next 48 months immediately following such termination, or his death,
whichever first occurs;
(bb) continue in full force for the same period and for the same
coverage all life insurance, medical, health and accident and disability
insurance maintained by it for his benefit at the time of his termination.
Notwithstanding the foregoing provisions should federal banking
regulations prohibit Upbancorp from continuing the benefits hereunder, then the
provisions of this Section 10 shall be of no affect so long as such prohibitions
continue and Ostrom during such time shall have no recourse against Upbancorp
under this section of this agreement.
11. If Ostrom is terminated by Upbancorp for cause, if he resigns for
other than good reason, or if termination occurs due to his death, disability or
retirement, then his employment has not been "terminated" for purposes of
Section 10, and Upbancorp shall be under no obligation to continue any benefits
under Section 10.
- 6 -
<PAGE>
"Cause" shall mean termination by Upbancorp because of (a) the
commission of a criminal act against Upbancorp or any of its subsidiaries, (b)
personally profiting from transactions to the detriment of Upbancorp in which
Upbancorp would have an interest without first obtaining its written consent,
(c) gross neglect of the office of President or Chairman and Chief Executive
Officer, (d) unwillingness to obey policies adopted by Upbancorp, Uptown or
Heritage.
"Good reason" shall mean voluntary termination by Ostrom because
Upbancorp (a) reduces his base salary, (b) discontinues his participation in any
benefit and/or incentive program (for example, life insurance, health and
accident insurance, disability insurance, pension, profit sharing, vacation),
(c) relocates him so as to require a change in personal residence or otherwise
work an undue hardship on him or member(s) of his immediate family, or (d)
reduces any of his current duties, authority, or status as President and Chief
Executive Officer, Chairman and Chief Executive Officer and Chairman
respectively of the three entities.
12. The benefits provided for in Section 10 shall be subject to the
following offsets and adjustments:
(a) no offset shall be made against the first one (1) year of
salary continuance in any event;
(b) if it is not possible under the terms of a particular
Upbancorp or Uptown benefit plan or program to continue Ostrom's participation
therein after termination, then Upbancorp or Uptown shall provide him with
substantially comparable
- 7 -
<PAGE>
benefits at no cost to him; provided, however, if subsequent employment provides
Ostrom with benefits substantially comparable to those provided by a particular
Upbancorp or Uptown benefit plan or program, then Upbancorp shall have no
obligation to (a) continue his participation in that particular plan or program
or (b) provide him with substantially comparable benefits once he satisfies his
eligibility requirements and becomes a participant in the subsequent employer's
plan or program. What is "substantially comparable" shall be solely determined
by Upbancorp and its decision shall be conclusive;
(c) in no event shall the benefits payable under Section 10
exceed that amount which is allowable under the Internal Revenue Code and the
Regulations thereunder as not constituting an "excess parachute payment".
Should any reduction in benefits be required pursuant to this provision, then
Ostrom shall within 30 days of having been advised of the requirement for
reduction, direct Upbancorp of the items of benefit to be reduced and the amount
of reduction to each. Upbancorp shall provide Ostrom with any information he
may reasonably need in order to arrive at a decision under this subsection.
13. Notwithstanding any other provisions of this contract, should
Upbancorp, Uptown or Heritage acquire or establish a separate additional bank or
banks, or become engaged in any other new activity, Ostrom may be entitled to be
separately compensated for his services rendered in an official status in said
bank or banks or new activity in accordance with the mutual agreement of
Upbancorp and Ostrom.
- 8 -
<PAGE>
14. Should the reported net earnings of Upbancorp exceed $3,000,000
for two consecutive years, then Ostrom shall be entitled to a renegotiated
contract for a period not to exceed five years.
15. Should changes in the Internal Revenue Code during the term of
this agreement materially affect the calculation of any benefit or benefits
hereunder, Ostrom shall be entitled to have the affected benefit calculated so
as to closely approximate the benefit contemplated at the date of this
agreement.
IN WITNESS WHEREOF, Ostrom has executed this instrument and Upbancorp
by order of the Board of Directors has caused this instrument to be executed as
of the date above first written.
/s/ Richard K. Ostrom
----------------------------------------
Richard K. Ostrom
UPBANCORP, INC.
By: /s/ Roger P. Eklund
-----------------------------------
ATTEST: /s/ Marvin L. Kocian
------------------------------
- 9 -
<PAGE>
AMENDMENT NO. 1
TO
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
This AMENDMENT NO. 1 to the Executive Employment Agreement (the
"Amendment") is being made and entered into as of the 29th day of July, 1998, by
and between Upbancorp, Inc., a Delaware corporation ("Upbancorp"), and Richard
K. Ostrom ("Ostrom").
WITNESSETH THAT:
WHEREAS, the parties entered into an Executive Employment Agreement as of
January 1, 1997 (the "Agreement"); and
WHEREAS, the parties hereto desire to amend the Agreement as set forth
below.
NOW, THEREFORE, the parties agree as follows:
SECTION 1. DEFINITIONS; REFERENCES. Unless otherwise specifically defined
herein, each term used herein which is defined in the Agreement shall have the
meaning assigned to such term in the Agreement. Except as amended and
supplemented hereby, all the terms of the Agreement shall remain and continue in
full force and effect and are hereby confirmed in all respects.
SECTION 2. AMENDMENT TO SECTION 2 OF THE AGREEMENT. Section 2 of the
Agreement shall read as follows:
"During the employment period, Upbancorp shall pay to Ostrom compensation
at the base rate of Two Hundred Fifty Thousand Dollars ($250,000) per annum
beginning calendar year July 1, 1998, $175,000 of which compensation shall
be payable in equal monthly installments. The balance, $75,000, shall
accrue monthly and be paid quarterly in the final month of each quarter
upon mutually agreeable dates."
SECTION 3. COUNTERPARTS; EFFECTIVENESS. This Amendment may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This amendment shall become effective as of the date hereof.
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be
executed as of the day and year first above written.
/s/ Richard K. Ostrom
-----------------------------------
Richard K. Ostrom
UPBANCORP, INC.
By: /s/ Marvin L. Kocian
------------------------------
Its Authorized Officer
By: /s/ Evy Johansen
------------------------------
Its Authorized Officer
<PAGE>
EXHIBIT C
EXECUTIVE EMPLOYMENT AGREEMENT
This Agreement is made as of and is effective the first day of January,
1999, between Heritage Bank, an Arizona corporation and state banking
association ("Heritage"), Upbancorp, Inc., a Delaware corporation ("Upbancorp"),
and John E. Fahrendorf, Jr. ("Fahrendorf").
Fahrendorf has served Heritage (formerly known as First West Bank) well and
favorably since July 15, 1991, and is now its President and Chief Executive
Officer. Heritage and Upbancorp, its parent company, desire to be assured of
Fahrendorf's continued valuable services as hereinafter provided.
In consideration of the foregoing and the mutual covenants herein
contained, it is agreed between the parties hereto as follows:
1. Heritage shall employ Fahrendorf on a full-time basis and Fahrendorf
shall serve Heritage on a full-time basis until December 31, 2000, unless said
employment period is extended as provided in Section 14 hereof. Said employment
on a full-time basis is hereinafter referred to as the "employment period".
During the employment period, Fahrendorf shall serve Heritage in an executive
capacity with such duties as may reasonably be assigned to him from time to time
by the Board of Directors of Heritage, consistent with Upbancorp's resolution
designating Fahrendorf as an executive officer, and he shall devote his full
time and attention during usual business hours exclusively to the business of
Heritage and Upbancorp except during usual vacation periods. Until further
action of the Board of Directors of Heritage, Fahrendorf shall continue in his
present capacity as President and Chief Executive Officer of Heritage.
2. During 1999, Heritage shall pay to Fahrendorf compensation at the base
rate of One Hundred Seventy Thousand Dollars ($170,000) per annum and during
2000, Heritage shall pay to
<PAGE>
Fahrendorf compensation at the base rate of One Hundred Seventy-Five Thousand
Dollars ($175,000) per annum.
2.1 Fahrendorf shall be entitled to additional "Incentive
Compensation" to be paid by Heritage in accordance with appropriate incentive
plans as amended or established by Upbancorp and Heritage.
3. During the employment period, Fahrendorf shall be entitled to
participate in the pension plan, as amended, maintained for employees of
Upbancorp and its subsidiaries, in any supplemental compensation plan for the
executives of the corporation, in any profit sharing or similar plan (ESOP,
401K, etc.), any stock option plan which Heritage or Upbancorp provides for its
employees, any long-term disability plan and any other benefit plan maintained
for executives of Heritage or Upbancorp. Upbancorp and Heritage will arrange
for Fahrendorf to participate in any such plans.
4. During the employment period, Fahrendorf shall be provided with a
luxury class vehicle to be mutually acceptable to Fahrendorf, Heritage and
Upbancorp. This vehicle will be provided by Heritage. Fahrendorf will pay an
established agreed upon rate for personal usage of the vehicle. All other
expense shall be borne by Heritage. At any time after three years after any
vehicle acquired has been placed in service, Heritage and Upbancorp shall, at
Fahrendorf's option, provide Fahrendorf with a replacement, luxury class
vehicle mutually acceptable to Fahrendorf, Heritage and Upbancorp and allow
Fahrendorf to acquire the original vehicle for its fair market value. Upon
Fahrendorf's retirement or termination under the provisions of Sections 10 or 15
below, he shall be permitted to acquire his then provided vehicle upon the same
terms as above.
2
<PAGE>
5. During the employment period, Heritage shall provide Fahrendorf with
life insurance on the same basis provided Heritage employees.
6. During the employment period, Heritage and Upbancorp in addition to
the life insurance provided for Fahrendorf under Section 5 above, will provide
Fahrendorf with insurance under Minnesota Mutual Life Insurance Co. Policy
1984491, which is a split dollar arrangement in the initial face amount of
$250,000 which adjusts for inflation, whereby Heritage is assigned the cash
value of the policy to the extent of the premiums paid by Heritage, and
Fahrendorf owns all other rights in the policy. Fahrendorf's obligation under
the arrangement shall be to pay the annual cost of the policy as if the policy
were a term policy, and Heritage shall pay the balance of the premiums.
Fahrendorf shall be entitled to receive each year a bonus in sufficient amount
and at such time that he will have the necessary funds to pay his required share
of the premiums and the resulting income taxes. Upon termination of employment,
Fahrendorf shall be afforded the right to continue the insurance upon payment to
Heritage of the amount it has contributed as its portion of the payment of the
premiums. Reasonable arrangements shall be made to continue the insurance
coverage in the case of Fahrendorf's disability. Furthermore, should Fahrendorf
leave his employment prior to Heritage having cash equity in the Split Dollar
Insurance policy equal to its cumulative premium contributions, Heritage shall
pay a bonus to Fahrendorf in an amount equal to that required to provide full
recovery by Heritage. Said bonus shall be treated as ordinary income to
Fahrendorf for inclusion in his personal income tax base.
7. During the employment period, unless Fahrendorf leaves employment
pursuant to the provisions of Section 10 hereof, Heritage shall provide him with
medical and dental coverage at no cost to Fahrendorf, said coverage to be the
same or equivalent to the coverage provided other
3
<PAGE>
Heritage or Upbancorp executive employees. Medical and dental coverage as
provided herein shall include spouse and dependent coverage for all children
under the age of twenty-three (23) who are not regularly employed. Said
dependent coverage shall not exceed coverage regularly available through
Heritage's insurers.
8. During his employment period, Fahrendorf shall be required to belong
to two Phoenix area clubs, one of which shall be a golf club and the other an in
town dining or athletic club. The clubs shall be selected primarily for
business purposes to facilitate the performance of Fahrendorf's duties as an
employee of Heritage, and unless otherwise approved by Heritage, shall be
Paradise Valley Country Club and the University Club. Subject to the following
provisions regarding personal charges, all costs of the clubs, including
periodic dues and assessments and charges incurred in promoting the business of
Heritage, shall be paid or reimbursed by Heritage. Fahrendorf shall be solely
responsible for any personal charges incurred at the clubs other than in the
furtherance of Heritage's business. Upon termination of Fahrendorf's employment
he shall be allowed to continue the memberships in his own name and at his own
expense free and clear of any interest of Heritage.
9. Fahrendorf agrees that for a period of ninety (90) days immediately
following the termination of his employment with Heritage, unless Fahrendorf is
terminated by Heritage or Upbancorp or leaves employment pursuant to the
provisions of Section 10 hereof, he will not directly or indirectly render
services in an executive management capacity similar to the one he now renders
Heritage as President and/or Chief Executive Officer to or for any financial
business in competition with Upbancorp or Heritage. Notwithstanding the
foregoing, the provisions of this
4
<PAGE>
Section shall cease to be applicable at the end of the term of this Agreement
unless renewed in any subsequent agreement.
10. If any one of the following occur while Fahrendorf is employed by
Heritage, and this Agreement is in effect, to wit:
(a) a "change in control" of Upbancorp or Heritage which may be
required to be reported to the Securities and Exchange Commission and/or the
Arizona State Banking Department and/or the Federal Deposit Insurance
Corporation and/or the Board of Governors of the Federal Reserve System; or
(b) thirty percent (30%) or more of the then outstanding voting
securities of Upbancorp are acquired or controlled by one person, group or
entity; or
(c) during any two (2) consecutive years the members of Upbancorp's
Board of Directors sitting at the beginning of that period cease to be a
majority (unless the newly elected Directors were nominated by at least
two-thirds of the members sitting at the beginning of that period); or
(d) Heritage is sold, merged or consolidated with another bank
holding company, bank or financial services institution other than a bank
holding company, bank or financial services institution which is controlled by
Upbancorp; or
(e) the consummation of a reorganization, merger or consolidation or
the sale or other disposition of' all or substantially all of the assets of
Upbancorp (a "Business Combination"), in each case, unless (1) all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the common stock of Upbancorp immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 60% of
the total voting power
5
<PAGE>
represented by the voting securities entitled to vote generally in the election
of directors of the corporation resulting from the Business Combination
(including, without limitation, a corporation which as a result of the Business
Combination owns Upbancorp or all or substantially all of Upbancorp's assets
either directly or through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to the Business Combination,
of the common stock of Upbancorp, and (2) at least two-thirds of the members of
the board of directors of the corporation resulting from the Business
Combination were members of Upbancorp's Board of Directors at the time of the
execution of the initial agreement, or action of Upbancorp's Board of Directors,
providing for such Business Combination;;
and if within three (3) years after the happening of any one of those
five (5) events (notwithstanding that the term of this Agreement may thereafter
have expired), Fahrendorf's employment is terminated then, unless any provision
of Section 11 hereof applies or unless Fahrendorf is that person or entity or
part of the group which causes any of the five (5) events, Heritage agrees to:
(aa) continue his base salary payable by the terms provided
above, for the next twenty-four (24) months immediately following such
termination, or until his death, whichever first occurs;
(bb) continue in full force for the same period and for the same
coverage all life insurance, medical, health and accident and disability
insurance maintained by it for his benefit at the time of his termination.
Notwithstanding the foregoing provisions, should Federal or State
of Arizona banking regulations prohibit Upbancorp or Heritage from continuing
the benefits hereunder, then
6
<PAGE>
the provisions of this Section 10 shall be of no affect so long as such
prohibitions continue and Fahrendorf during such time shall have no recourse
against Upbancorp or Heritage under this Section of the Agreement.
11. If Fahrendorf is terminated by Heritage for cause, if he resigns for
other than good reason, or if termination occurs due to his death, disability or
retirement, then his employment has not been "terminated" for purposes of
Section 10, and Upbancorp or Heritage shall be under no obligation to continue
any benefits under Section 10.
"Cause" shall mean termination by Upbancorp or Heritage because of (a)
the commission of a criminal act against Upbancorp or Heritage or any of its
subsidiaries, (b) personally profiting from transactions to the detriment of
Upbancorp or Heritage in which Upbancorp or Heritage would have an interest
without first obtaining its written consent, or (c) gross neglect of the office
of President and Chief Executive Officer of Heritage.
"Good reason" shall mean voluntary termination by Fahrendorf because
Heritage (a) reduces his base salary, (b) discontinues his participation in any
benefit and/or incentive program (for example, life insurance, health and
accident insurance, disability insurance, pension, profit sharing, vacation);
provided, however, that this provision shall not apply if Heritage determines in
its sole discretion to terminate any benefit and/or incentive program available
generally to its employees or its executive employees, (c) relocates him so as
to require a change in personal residence or otherwise work an undue hardship on
him or member(s) of his immediate family, or (d) reduces any of his current
duties, authority, or status as President and Chief Executive Officer.
12. The benefits provided for in Section 10 shall be subject to the
following offsets and adjustments:
7
<PAGE>
(a) if it is not possible under the terms of a particular Heritage
benefit plan or program to continue Fahrendorf's participation therein after
termination, then Heritage shall provide him with substantially comparable
benefits at no cost to him; provided, however, if subsequent employment provides
Fahrendorf with benefits substantially comparable to those provided by a
particular Upbancorp or Heritage benefit plan or program, then Upbancorp or
Heritage shall have no obligation to (a) continue his participation in that
particular plan or program or (b) provide him with substantially comparable
benefits once he satisfies his eligibility requirements and becomes a
participant in the subsequent employer's plan or program. What is "substantially
comparable" shall be determined in good faith solely by Upbancorp and its
decision shall be conclusive;
(b) in no event shall the benefits payable under Section 10 exceed
that amount which is allowable under the Internal Revenue Code and the
regulations thereunder as not constituting an "excess parachute payment".
Should any reduction in benefits be required pursuant to this provision, then
Fahrendorf shall within thirty (30) days of having been advised of the
requirement for reduction, direct Heritage of the items of benefit to be reduced
and the amount of reduction to each. Heritage and Upbancorp shall provide
Fahrendorf with any information he may reasonably need in order to arrive at a
decision under this subsection.
13. Should changes in the Internal Revenue Code during the term of this
agreement materially affect the calculation of any benefit or benefits
hereunder, Fahrendorf shall be entitled to have the affected benefit calculated
so as to closely approximate the benefit contemplated at the date of this
Agreement.
14. This Agreement shall be extended for a one-year period commencing
January 1, 2001, if Fahrendorf has achieved all of the following goals:
8
<PAGE>
(a) the revocation by the FDIC of the Memorandum of Understanding
arising out of the FDIC's compliance examination of Heritage conducted during
1998;
(b) no actions shall have been commenced against Heritage by bank
regulatory authorities;
(c) Heritage shall have received a CAMELS rating of "2" from bank
regulatory authorities with respect to the most recent regulatory examination
conducted prior to September 30, 2000;
(d) Heritage shall have received "Satisfactory" ratings from bank
regulatory authorities with respect to the most recent CRA and Compliance
examinations conducted prior to September 30, 2000;
(e) the efficiency ratio of Heritage as of June 30, 2000 shall have
decreased from the efficiency ratio of Heritage as of December 31, 1998;
(f) Heritage shall have achieved the net income goals set forth in
each year's budget as approved by Heritage's and Upbancorp's Board of Directors;
and
(g) Fahrendorf shall have reasonably assisted Upbancorp in
transferring activities of Heritage from Heritage to Upbancorp or other related
entities as directed by Upbancorp's Board of Directors.
The determination that Fahrendorf has achieved all of the aforementioned goals
shall be made in good faith by the Board of Directors of Upbancorp by September
30, 2000, whose determination shall be final and binding upon the parties
hereto. In the event this Agreement is extended for one year, Fahrendorf and
Heritage and Upbancorp shall agree upon his base rate compensation for such year
with said base rate being no less than One Hundred Seventy-Five Thousand Dollars
($175,000).
9
<PAGE>
15. Should Upbancorp or Heritage terminate Fahrendorf's employment
hereunder without cause as defined in Section 11 hereof, then Fahrendorf shall
be entitled to severance pay equivalent to his base salary then payable under
Section 2 for one (1) year payable monthly together with all benefits otherwise
conferred in the other Sections of this Agreement other than Section 10. Any
deferred portion of any incentive amounts earned but not payable under any
incentive plan of Upbancorp or Heritage shall be due and payable upon
Fahrendorf's termination without cause, but if Fahrendorf terminates or elects
not to renew the Agreement, then such deferred amounts shall be forfeited.
16 Upbancorp guarantees the performance by Heritage of its undertaking
under each and every provision hereof.
17. This Agreement may not be amended except by an instrument in writing
signed by all of the parties hereto.
18. This Agreement shall be construed and interpreted according to the
laws of the State of Delaware without regard to conflicts of laws principles
thereof, except to the extent that the federal laws of the United States apply.
19. This Agreement supersedes all prior Agreements, either oral or
written, pertaining to Fahrendorf's compensation or employment.
10
<PAGE>
IN WITNESS WHEREOF, Fahrendorf has executed this instrument and Heritage
and Upbancorp by order of the respective Board of Directors has caused this
instrument to be executed as of the date above first written.
/s/ John E. Fahrendorf, Jr.
----------------------------------------
John E. Fahrendorf, Jr.
HERITAGE BANK
By: Kathleen L. Harris
-------------------------------------
ATTEST: Richard K. Ostrom
---------------------------------
UPBANCORP, INC.
By: Richard K. Ostrom
-------------------------------------
ATTEST: Kathleen L. Harris
---------------------------------
11
<PAGE>
EXHIBIT D
EXECUTIVE EMPLOYMENT AGREEMENT
This Agreement is made as of and is effective the first day of January,
1999, between Uptown National Bank of Chicago, a national banking association
("Uptown"), Upbancorp, Inc., a Delaware corporation ("Upbancorp"), and Robert P.
Griffiths ("Griffiths").
Griffiths has served Uptown well and favorably since April 5, 1993, and is
now its President and Chief Executive Officer. Uptown and Upbancorp, its parent
company, desire to be assured of Griffiths' continued valuable services as
hereinafter provided. In consideration of the foregoing and the mutual
covenants herein contained, it is agreed between the parties hereto as follows:
1. Uptown shall employ Griffiths on a full-time basis and Griffiths shall
serve Uptown on a full-time basis until December 31, 2000, unless said
employment period is extended as provided in Section 14 hereof. Said employment
on a full-time basis is hereinafter referred to as the "employment period".
During the employment period, Griffiths shall serve Uptown in an executive
capacity with such duties as may reasonably be assigned to him from time to time
by the Board of Directors of Uptown, consistent with Upbancorp's resolution
designating Griffiths as an executive officer, and he shall devote his full time
and attention during usual business hours exclusively to the business of Uptown
and Upbancorp except during usual vacation periods. Until further action of the
Board of Directors of Uptown, Griffiths shall continue in his present capacity
as President and Chief Executive Officer of Uptown.
2. During 1999, Uptown shall pay to Griffiths compensation at the base
rate of One Hundred Seventy-Two Thousand Five Hundred Dollars ($172,500) per
annum and during 2000, Uptown shall pay to Griffiths compensation at the base
rate of One Hundred Seventy-Seven Thousand Five Hundred Dollars ($177,500).
<PAGE>
2.1 Griffiths shall be entitled to additional "Incentive
Compensation" to be paid by Uptown in accordance with appropriate incentive
plans amended or established by Upbancorp.
3. During the employment period, Griffiths shall be entitled to
participate in the pension plan, as amended, maintained for employees of
Upbancorp and its subsidiaries, in any supplemental compensation plan for
executives of the corporation, in any profit sharing or similar plan (ESOP,
401K, etc.), any stock option plan which Uptown or Upbancorp my provide for its
employees, any long-term disability plan and any other benefit plan maintained
for executives of Uptown or Upbancorp. Upbancorp and Uptown will arrange for
Griffiths to participate in any such plans.
4. During the employment period, Griffiths shall be provided with a
luxury class vehicle to be mutually acceptable to Griffiths, Uptown and
Upbancorp. This vehicle will be provided by Uptown. Griffiths will pay an
established agreed upon rate for personal usage of the vehicle. All other
expense shall be borne by Uptown. At any time after three years after any
vehicle acquired has been placed in service, Uptown and Upbancorp shall at
Griffiths' option provide Griffiths with a replacement luxury class vehicle
mutually acceptable to Griffiths, Uptown and Upbancorp and allow Griffiths to
acquire the original vehicle for its fair market value. Upon Griffiths'
retirement or termination under the provisions of Sections 10 or 15 below, he
shall be permitted to acquire his then provided vehicle upon the same terms as
above.
5. During the employment period, Uptown shall provide Griffiths with life
insurance on the same basis provided Uptown employees.
6. During the employment period, Upbancorp and Uptown, in addition to the
life insurance provided for Griffiths under Section 5 above, will provide
Griffiths with insurance under Minnesota Mutual Life Insurance Co. Policy
1989654, which is a split dollar arrangement in the
2
<PAGE>
initial face amount of $250,000 which adjusts for inflation, whereby Uptown is
assigned the cash value of the policy to the extent of the premiums paid by
Uptown, and Griffiths owns all other rights in the policy. Griffiths'
obligation under the arrangement shall be to pay the annual cost of the policy
as if the policy were a term policy, and Uptown shall pay the balance of the
premiums. Griffiths shall be entitled to receive each year a bonus in
sufficient amount and at such time that he will have the necessary funds to pay
his required share of the premiums and the resulting income taxes. Upon
termination of employment, Griffiths shall be afforded the right to continue the
insurance upon payment to Uptown of the amount it has contributed as its portion
of the payment of the premiums. Reasonable arrangements shall be made to
continue the insurance coverage in the case of Griffiths' disability.
Furthermore, should Griffiths leave his employment prior to Uptown having cash
equity in the Split Dollar Insurance policy equal to its cumulative premium
contributions, Uptown shall pay a bonus to Griffiths in an amount equal to that
required to provide full recovery by Uptown. Said bonus shall be treated as
ordinary income to Griffiths for inclusion in his personal income tax base.
7. During the employment period, unless Griffiths leaves employment
pursuant to the provisions of Section 10 hereof, Uptown shall provide him with
medical and dental coverage at no cost to Griffiths, said coverage to be the
same or equivalent to the coverage provided other Uptown or Upbancorp executive
employees. Medical and dental coverage as provided herein shall include spouse
and dependent coverage for all children. under the age of twenty-three (23) who
are not regularly employed. Said dependent coverage shall not exceed coverage
regularly available through Uptown's insurers.
8. During the employment period, Griffiths shall be required to belong to
two Chicago area clubs, one of which shall be a golf club and the other a dining
or in town athletic club. The
3
<PAGE>
choice of clubs shall be Griffiths' and they shall be primarily chosen for
business purposes, and unless otherwise approved by Uptown, shall be Onwetsia
Country Club and the University Club. The cost of said clubs shall be borne by
Uptown and Griffiths shall reimburse Uptown for any strictly personal charges
incurred. He shall not be required to reimburse Uptown for any dues or
assessments. Upon Griffiths' termination of employment hereunder, he shall be
allowed to continue membership in said clubs but at his expense.
9. Griffiths agrees that for a period of ninety (90) days immediately
following the termination of his employment with Uptown, unless Griffiths is
terminated by Upbancorp or Uptown or leaves employment pursuant to the
provisions of Section 10 hereof, he will not directly or indirectly render
services in an executive management capacity similar to the one he now renders
Uptown as President and/or Chief Executive Officer to or for any financial
business in competition with Uptown or Upbancorp. Notwithstanding the
foregoing, the provisions of this Section shall cease to be applicable at the
end of the term of this Agreement unless renewed by any subsequent agreement.
10. If any one of the following occur while Griffiths is employed by
Uptown, and this Agreement is in effect, to wit:
(a) a "change in control" of Upbancorp or Uptown which may be
required to be reported to the Securities and Exchange Commission and/or the
Office of the Comptroller of the Currency and/or the Board of Governors of the
Federal Reserve System; or
(b) thirty percent (30%) or more of the then outstanding voting
securities of Upbancorp are acquired or controlled by one person, group or
entity; or
4
<PAGE>
(c) during any two (2) consecutive years the members of Upbancorp's
Board of Directors sitting at the beginning of that period cease to be a
majority (unless the newly elected Directors were nominated by at least
two-thirds of the members sitting at the beginning of that period); or
(d) Uptown is sold, merged or consolidated with another bank holding
company, bank or financial services institution other than a bank holding
company, bank or financial services institution which is controlled by
Upbancorp, or
(e) the consummation of a reorganization, merger or consolidation or
the sale or other disposition of all or substantially all of the assets of
Upbancorp (a "Business Combination"), in each case, unless (1) all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the common stock of Upbancorp immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 60% of
the total voting power represented by the voting securities entitled to vote
generally in the election of directors of the corporation resulting from the
Business Combination (including, without limitation, a corporation which as a
result of the Business Combination owns Upbancorp or all or substantially all of
Upbancorp's assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately prior to the
Business Combination, of the common stock of Upbancorp, and (2) at least
two-thirds of the members of the board of directors of the corporation resulting
from the Business Combination were members of Upbancorp's Board of Directors at
the time of the execution of the initial agreement, or action of Upbancorp's
Board of Directors, providing for such Business Combination;
5
<PAGE>
and if within three (3) years after the happening of any one of those
five (5) events (notwithstanding that the term of this Agreement may have
expired), Griffiths' employment is terminated then, unless any provision of
Section 11 hereof applies or unless Griffiths is that person or entity or part
of the group which causes any of the five (5) events, Uptown agrees to:
(aa) continue his salary payable by the terms provided above, for the
next twenty-four (24) months immediately following such termination, or until
his death, whichever first occurs;
(bb) continue in full force for the same period and for the same
coverage all life insurance, medical, health and accident and disability
insurance maintained by it for his benefit at the time of his termination.
Notwithstanding the foregoing provisions, should federal banking
regulations prohibit Upbancorp or Uptown from continuing the benefits hereunder,
then the provisions of this Section 10 shall be of no affect so long as such
prohibitions continue and Griffiths during such time shall have no recourse
against Upbancorp or Uptown under this Section of this Agreement.
11. If Griffiths is terminated by Uptown for cause, if he resigns for
other than good reason, or if termination occurs due to his death, disability or
retirement, then his employment has not been "terminated" for purposes of
Section 10, and Upbancorp or Uptown shall be under no obligation to continue any
benefits under Section 10.
"Cause" shall mean termination by Upbancorp or Uptown because of (a)
the commission of a criminal act against Upbancorp or Uptown or any of its
subsidiaries, (b) personally profiting from transactions to the detriment of
Upbancorp or Uptown in which Upbancorp or Uptown would have an interest without
first obtaining its written consent, or (c) gross neglect of the office of
President and Chief Executive Officer of Uptown.
6
<PAGE>
"Good reason" shall mean voluntary termination by Griffiths because
Uptown (a) reduces his base salary, (b) discontinues his participation in any
benefit and/or incentive program (for example, life insurance, health and
accident insurance, disability insurance, pension, profit sharing, vacation);
provided, however, that this provision shall not apply if Uptown determines in
its sole discretion to terminate any benefit and/or incentive program available
generally to its employees or its executive employees, (c) relocates him so as
to require a change in personal residence or otherwise work an undue hardship on
him or member(s) of his immediate family, or (d) reduces any of his current
duties, authority, or status as President and Chief Executive Officer.
12. The benefits provided for in Section 10 shall be subject to the
following offsets and adjustments:
(a) no offset shall be made against the first six (6) months of
salary continuance in any event;
(b) if it is not possible under the terms of a particular Uptown
benefit plan or program to continue Griffiths' participation therein after
termination, then Uptown shall provide him with substantially comparable
benefits at no cost to him; provided, however, if subsequent employment provides
Griffiths with benefits substantially comparable to those provided by a
particular Upbancorp or Uptown benefit plan or program, then Upbancorp or Uptown
shall have no obligation to (a) continue his participation in that particular
plan or program or (b) provide him with substantially comparable benefits once
he satisfies his eligibility requirements and becomes a participant in the
subsequent employer's plan or program. What is "substantially comparable" shall
be determined in good faith solely by Upbancorp and its decision shall be
conclusive;
7
<PAGE>
(c) in no event shall the benefits payable under Section 10 exceed
that amount which is allowable under the Internal Revenue Code and the
regulations thereunder as not constituting an "excess parachute payment".
Should any reduction in benefits be required pursuant to this provision, then
Griffiths shall within thirty (30) days of having been advised of the
requirement for reduction, direct Uptown of the items of benefit to be reduced
and the amount of reduction to each. Uptown and Upbancorp shall provide
Griffiths with any information he may reasonably need in order to arrive at a
decision under this subsection.
13. Should changes in the Internal Revenue Code during the term of this
Agreement materially affect the calculation of any benefit or benefits
hereunder, Griffiths shall be entitled to have the affected benefit calculated
so as to closely approximate the benefit contemplated at the date of this
Agreement.
14. This Agreement shall be extended for a one-year period commencing
January 1, 2001, if Griffiths has achieved all of the following goals:
(a) no actions shall have been commenced against Uptown by bank
regulatory authorities;
(b) Uptown shall have received a CAMELS rating of "2" from bank
regulatory authorities with respect to the most recent regulatory examination
conducted prior to September 30, 2000;
(c) Uptown shall have received "Satisfactory" ratings from bank
regulatory authorities with respect to the most recent CRA and Compliance
examinations conducted prior to September 30, 2000;
8
<PAGE>
(d) the efficiency ratio of Uptown as of June 30, 2000 shall have
decreased from the efficiency ratio of Uptown as of December 31, 1998;
(e) Uptown shall have achieved the net income goals set forth in each
year's budget as approved by Uptown's and Upbancorp's Board of Directors; and
(f) Griffiths shall have reasonably assisted Upbancorp in
transferring agreed upon activities of Uptown from Uptown to Upbancorp or other
related entities as directed by Upbancorp's Board of Directors. The
determination that Griffiths has achieved all of the aforementioned goals shall
be made in good faith by the Board of Directors of Upbancorp by September 30,
2000, whose determination shall be final and binding upon the parties hereto.
In the event this Agreement is extended for one year, Griffiths and Uptown and
Upbancorp shall agree upon his base rate compensation for such year with said
base rate being no less than One Hundred Seventy-Seven Thousand Five Hundred
Dollars ($177,500).
15. Should Upbancorp or Uptown terminate Griffiths' employment hereunder
without cause as defined in Section 11 hereof, then Griffiths shall be entitled
to severance pay equivalent to his base salary then payable under Section 2 for
one (1) year payable monthly together with all benefits otherwise conferred in
the other Sections of this Agreement other than Section 10. Any deferred
portion of any incentive amounts earned but not payable under any incentive plan
of Upbancorp and Uptown shall be due and payable upon Griffiths' termination
without cause, but if Griffiths terminates or elects not to renew the Agreement,
then such deferred amounts shall be forfeited.
16. Upbancorp guarantees the performance by Uptown of its undertaking
under each and every provision hereof.
9
<PAGE>
17. This Agreement may not be amended except by an instrument in writing
signed by all of the parties hereto.
18. This Agreement shall be construed and interpreted according to the
laws of the State of Delaware without regard to conflicts of laws principles
thereof, except to the extent that the federal laws of the United States apply.
19. This Agreement supersedes all prior Agreements, either oral or
written, pertaining to Griffiths' compensation or employment.
IN WITNESS WHEREOF, Griffiths has executed this instrument and Uptown and
Upbancorp by order of the respective Boards of Directors has caused this
instrument to be executed as of the date above first written.
/s/ Robert P. Griffiths
-------------------------------
Robert P. Griffiths
UPTOWN NATIONAL BANK OF CHICAGO
By: Richard K. Ostrom
-----------------------------
ATTEST: Evy Johansen
---------------------------
UPBANCORP, INC.
By: Richard K. Ostrom
-----------------------------
ATTEST: Marvin L. Kocian
---------------------------
10
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