<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, 1999.
Commission file number 0-12292
UPBANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3207297
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
4753 N. BROADWAY, CHICAGO, ILLINOIS 60640
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code (773) 878-2000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK-$1
PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing for the
past 90 days. Yes X No
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 10, 2000 (based upon the closing price as of such date),
was approximately $16,382,049.
The number of shares outstanding of the registrant's common stock, $1.00 par
value, as of March 10, 2000 is 837,308.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to be held
April 18, 2000, are incorporated by reference into Part III of this Form 10-K.
<PAGE>
<TABLE>
<CAPTION>
UPBANCORP, INC.
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TABLE OF CONTENTS
PAGE
<S> <C> <C>
PART I............................................................................................................3
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
P A R T II.......................................................................................................8
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 7a: Quantitative And Qualitative Disclosures On Market Risk..............................................21
Item 8: Financial Statements And Supplementary Data..........................................................22
Item 9: Changes In And Disagreements With Accountants On Accounting And Financial Disclosures................43
PART III.........................................................................................................43
Item 10: Directors And Executive Officers Of The Registrant...................................................43
Item 11: Executive Compensation...............................................................................43
Item 12: Security Ownership Of Certain Beneficial Owners And Management.......................................43
Item 13: Certain Relationships And Related Transactions.......................................................43
PART IV..........................................................................................................44
Item 14: Exhibits, Financial Statement Schedules And Reports On Form 8-K......................................44
</TABLE>
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PART I
ITEM 1: BUSINESS
UPBANCORP, INC.
Upbancorp, Inc. ("Upbancorp" or the "Company"), is a multi-bank holding
company organized in 1983 under the laws of the State of Delaware. Upbancorp
owns all 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 $325
million at year-end 1999 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 149 full-time
equivalent employees at December 31, 1999.
Based on the Company's approach to decision making, it has decided that its
business is comprised of a single segment.
SUBSIDIARY BANKS
The Company's affiliates consist of two full-service community banks, which
operate six 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 three facilities, which are leased.
In February, 2000, Uptown applied to the Office of the Comptroller of the
Currency ("OCC") to merge Heritage with and into and under the charter of
Uptown. Following the consummation of the merger, the offices of Heritage will
operate as branches of Uptown. Heritage will retain its name in the Phoenix
area. This is in response to our ongoing effort to further enhance operational
efficiencies and improve profitability. All current locations will remain fully
operational with no resulting adverse changes to our products and services
offered.
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 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.
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Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and the Subsidiary Banks, regulate, among
other things, the scope of business, investments, reserves against deposits,
capital levels relative to operations, the nature and amount of collateral for
loans, the establishment of branches, mergers, consolidations and dividends.
This supervision and regulation is intended primarily for the protection of the
FDIC's Bank Insurance Fund and the depositors, rather than the shareholders of
financial institutions.
The Company is subject to supervision and regulation by the 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. Once the two subsidiary
banks are merged, all banks will be supervised by the OCC.
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
Exchange Act of 1934, as amended. Consequently, the Company is subject to the
information, proxy solicitation, insider trading and other restrictions and
requirements of the SEC under 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
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and electronic data interchange have also resulted in intensified competition
with traditional banking distribution systems.
Both Illinois and Arizona are highly competitive markets for banking and
related financial services. Since these areas are the Company's primary focus
markets, the Subsidiary Banks are exposed to varying types and levels of
competition. In general, each Subsidiary Bank competes, anticipates and responds
within each individual market area. Both Subsidiary Banks compete and rely
heavily on the high level of quality service provided to our customers. The
Company has seen the level of competition and number of competitors in its
market places increase in recent years and expects a continuation of these
competitive market conditions.
CAPITAL GUIDELINES
The FRB, the OCC and the FDIC have 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, 1999. A further discussion of the capital guidelines is in the Capital
Resources section included 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 banks deduct
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losses and bad debts from "net profits then on hand". It also specifies that a
portion of a bank's capital surplus account may be included as "net profits then
on hand" to the extent that it represents earnings from prior periods.
Section 60 requires the OCC's approval if the total of all dividends
declared in any calendar year will exceed the institution's net profits of that
year combined with its retained net profits of the preceding two years, less any
required transfers to surplus. In calculating its net profits under Section 60 a
national bank may not add back provisions made to its allowance for loan losses
nor deduct net charge-offs.
ARIZONA STATE-CHARTERED BANK RESTRICTIONS
Under the provisions of the Arizona Bank Code, dividends may not be
declared by state-chartered banks unless they are made in compliance within the
banking laws of Arizona. Additionally, the payment of dividends by a
state-chartered bank whose deposits are insured by the Bank Insurance Fund, is
affected by the requirement to maintain minimum capital pursuant to the capital
adequacy guidelines issued by the FDIC.
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ITEM 2: PROPERTIES
The following table summarizes the Company and Subsidiary Banks' properties
by location:
<TABLE>
<CAPTION>
AFFILIATE PROPERTY TYPE/LOCATION OWNERSHIP SQUARE FOOTAGE
<S> <C> <C> <C>
THE COMPANY 4753 N. Broadway - -
Chicago, Illinois
UPTOWN Main Office:
4753 N. Broadway Owned 149,000 (Note 1)
Chicago, Illinois
Banking Office:
6041 N. Clark Street Owned 2,100 (Note 1)
Chicago, Illinois
Banking Office:
5345 N. Sheridan Road Leased 1,500
Chicago, Illinois
Banking Office:
1058 W. Bryn Mawr Avenue Leased 1,500
Chicago, Illinois
Aircraft Lending Office:
43 W 518 Route 30 Leased 1,800
Aurora Municipal Airport
Sugar Grove, Illinois
HERITAGE Main Office:
4222 E. Camelback Road Leased 4,100
Suite J200
Phoenix, Arizona
Banking Office:
4222 E. Camelback Road Leased 4,100
Suite J100
Phoenix, Arizona
Banking Office:
1333 W. Broadway Owned 10,500
Tempe, Arizona
</TABLE>
At December 31, 1999, the properties and equipment of the Company had an
aggregate net book value of approximately $6.0 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
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ITEM 3: LEGAL PROCEEDINGS
Neither the Company nor its Subsidiary Banks are party to any litigation,
which in the judgment of management after consultation with counsel, would have
a material effect on the financial position or results of operations of the
Company or the Subsidiary Banks.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no items submitted to a vote of security holders during the
fourth quarter of 1999.
P A R T II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the Over-The-Counter market under
the symbol UPBN. As of December 31, 1999, there were 318 shareholders of record.
The following table sets forth common stock information during each quarter of
1999 and 1998. This information has been adjusted to reflect the Company's
four-for-one stock split in October, 1998.
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------- -----------------------------------------------
MARKET PRICE OF Fourth Third Second First Fourth Third Second First
---------- ---------- ----------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMON STOCK:
High $33.25 $37.50 $37.50 $35.00 $36.25 $36.25 $37.25 $36.25
Low 33.00 32.50 32.50 33.00 35.00 35.69 35.50 32.75
Quarter-End 33.00 33.00 32.50 35.00 35.25 36.25 35.84 36.25
CASH DIVIDENDS PER SHARE 0.130 0.130 0.130 0.130 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 included under Item 8 of this Form 10-K.
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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, 1999 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) 1999 1998 1997 1996 1995
------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Interest income $ 23,530 $ 20,040 $ 17,722 $ 15,805 $ 15,312
Interest expense 8,547 7,109 6,115 5,425 5,383
------------- ------------- ------------ ------------- ------------
Net interest income 14,983 12,931 11,607 10,380 9,929
Provision for loan losses 885 580 410 914 717
Other income 3,213 3,154 2,667 2,440 1,982
Other expense 13,349 11,940 10,760 10,059 9,551
------------- ------------- ------------ ------------- ------------
Income before income taxes 3,962 3,565 3,104 1,847 1,643
Applicable income taxes 1,385 1,265 1,127 693 625
------------- ------------- ------------ ------------- ------------
Net income $ 2,577 $ 2,300 $ 1,977 $ 1,154 $ 1,018
------------- ------------- ------------ ------------- ------------
------------- ------------- ------------ ------------- ------------
PER SHARE DATA:
Net income $ 3.00 $ 2.63 $ 2.24 $ 1.30 $ 1.15
Cash dividends declared 0.52 0.50 0.50 0.50 0.50
Dividend payout ratio 17.31% 19.04% 22.31% 38.39% 43.61%
Book value 26.90 26.02 23.79 21.36 20.76
Market price 33.00 5.25 31.13 17.06 15.00
Weighted average shares 859,710 875,907 882,800 885,741 888,000
BALANCE SHEET HIGHLIGHTS:
Assets $324,777 $269,462 $ 231,377 $226,395 $ 206,341
Loans, net of unearned discount 249,719 195,095 166,252 131,069 111,208
Deposits 270,155 226,034 198,132 195,302 180,773
Shareholders' equity 22,524 22,638 21,000 18,856 18,434
Average equity to average asset ratio 7.77% 8.69% 8.73% 8.58% 8.63%
Asset growth rate 20.53% 16.46% 2.20% 9.72% (1.85%)
PERFORMANCE RATIOS:
Return on average assets .87% .91% .87% .54% .49%
Return on average shareholders' equity 11.22% 10.44% 9.98% 6.28% 5.66%
Net interest margin (FTE) (1) 4.73% 4.74% 4.84% 4.62% 4.60%
Percentage nonperfoming loans/
loans, net of unearned discount 0.36% 0.67% 0.69% 1.61% 3.42%
Percentage of nonperfoming assets/
total assets 0.28% 0.49% 0.64% 1.14% 2.56%
</TABLE>
(1) FTE - Fully taxable equivalent
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following management's discussion and analysis of financial condition
and results of operations should be read in conjunction with the Company's
Consolidated Financial Statements and Notes to Consolidated Financial Statements
presented in Item 8 of this Form 10-K as well as the 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 1999 totaled $2,577 or $3.00 per
share. This is compared to net income and earnings per share of $2,300 or $2.63
and $1,977 or $2.24 for 1998 and 1997, respectively. The results of 1999
represent a 12% improvement in net income from 1998 after a 16% improvement in
1998 over 1997. As we noted last year and, again, consistent in the current
year, the earnings improvement is mostly attributable to increased net interest
income.
The operating performance of bank holding companies is often measured and
comparisons made based on net income to average assets and net income to average
equity. The Company's return on average shareholders' equity for 1999 was 11.22%
as compared to 10.44% in 1998 and 9.98% in 1997. Return on average assets for
1999 was .87% as compared to .91% in 1998 and .87% in 1997.
Nonperforming loans decreased as a percentage of outstanding loans during
the past three year period. Nonperforming loans totaled $907 or .36% of net
loans at December 31, 1999 as compared to $1,309 or .67% in 1998 and $1,148 or
.69% in 1997.
Upbancorp continues to maintain a strong capital base at December 31, 1999.
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 82% of
the Company's net revenues in 1999. 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 net interest
income FTE.
Net interest income on a fully taxable equivalent basis totaled $15,238 in
1999 compared to $13,115 in 1998 and $11,720 in 1997. The significant increase
in net interest income in 1999 includes an increase of $2,503 due to volume
increases in 1999 following a $1,844 increase due to volume in 1998. Rate
movements negatively impacted the overall improvement in net interest income by
$315 after negatively impacting net interest income by $395 in 1998.
The 1999 volume increase was fueled by the earning assets added to the
balance sheet. Average interest earning assets increased by $40,597 or 17.29%.
The majority of that increase is the result of growth in average loan balances
due in large part to the strong economic conditions, including the real estate
markets in both the Chicago and Phoenix metropolitan areas. In addition, we
recognize continued success of Zook Pilot Services, the aircraft lending
division. The loan growth was funded via a more aggressive pricing
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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 5.53% in 1999 from
5.58% in 1998.
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>
1999 1998 1997
--------------------------------- -------------------------------- ---------------------------------
Average Yield/ Average Yield/ Average Yield/
ASSETS: Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------- ----------- ------- ------------ ----------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
Taxable $ 38,104 $ 2,309 6.06% $ 42,108 $ 2,540 6.03% $ 54,005 $ 3,263 6.04%
Non-taxable (1)(2) 6,987 609 8.72% 4,015 399 9.94% 2,189 236 10.78%
Federal funds sold 4,174 209 5.01% 8,355 437 5.23% 7,390 401 5.43%
Mortgages held-for-sale 1,534 86 5.61% 2,314 118 5.10% 1,262 83 6.58%
Loans, net of unearned
discount (2)(3) 224,666 20,572 9.16% 178,076 16,730 9.39% 144,898 13,852 9.56%
------------- ----------- ------- ------------ ----------- ------- ------------ ----------- --------
Total interest earning
assets (1)(2)(3) $275,465 $23,785 8.63% $234,868 $20,224 8.61% $209,744 $17,835 8.50%
------------- ----------- ------- ------------ ----------- ------- ------------ ----------- --------
Cash and due from banks 11,073 10,073 8,633
Allowance for loan losses (2,759) (2,247) (1,700)
Other assets 11,705 10,865 10,402
------------- ------------ ------------
Total assets $295,484 $253,559 $227,079
============= ============ ============
LIABILITIES &
SHAREHOLDERS' EQUITY:
Savings, NOW and
money market deposits $109,264 $ 3,020 2.76% $100,853 $ 2,670 2.65% $101,227 $ 2,577 2.55%
Other time deposits 88,203 4,438 5.03% 67,727 3,630 5.36% 59,361 3,158 5.32%
Borrowed funds 21,411 1,089 5.09% 14,955 809 5.41% 6,521 380 5.83%
------------- ----------- ------- ------------ ----------- ------- ------------ ----------- --------
Total interest bearing
liabilities $218,878 $ 8,547 3.90% $183,535 $ 7,109 3.87% $167,109 $ 6,115 3.66%
------------- ----------- ------- ------------ ----------- ------- ------------ ----------- --------
Demand deposits 49,638 45,306 38,254
Other liabilities 3,994 2,685 1,897
Shareholders' equity 22,974 22,033 19,819
------------- ------------ ------------
Total liabilities and
shareholders' equity $295,484 $253,559 $227,079
============= ----------- ------- ============ ----------- ------- ============ ----------- --------
Net interest income/margin
(1)(3) $ 15,238 4.73% $13,115 4.74% $11,720 4.84%
=========== ======= =========== ======= =========== ========
Net interest income/earning assets 5.53% 5.58% 5.59%
======= ======= ========
</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
1999, 1998 and 1997.
(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 $1,133,
$907, and $773 for the years ended December 31, 1999, 1998, and 1997,
respectively. At December 31, 1999, 1998, and 1997, deferred loan and
commitment fee income, net of direct loan origination costs, totaled $438,
$235, and $244, respectively.
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Table 2 analyzes the changes in interest income, interest expense and net
interest income that result from changes in volumes of earning assets and
funding sources, as well as fluctuations in interest rates. Changes noted in the
volume/rate column represent variances attributable jointly to changes in volume
and rate.
TABLE 2
CHANGES IN NET INTEREST INCOME APPLICABLE TO VOLUMES AND INTEREST RATES
<TABLE>
<CAPTION>
1999 COMPARED TO 1998 Increase Income/Expense Increase/(Decrease) dues to:
- --------------------- ---------------------------------------------- -------------------------------------
Increase Volume/
1999 1998 (Decrease) Volume Rate Rate
------------ --------------- --------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Taxable $ 2,309 $ 2,540 $ (231) $ (242) $ 12 $ (1)
Non-taxable (1) 609 399 210 295 (49) (36)
Federal funds sold 209 437 (228) (219) (19) 9
Mortgages held-for-sale 86 118 (32) (40) 12 (4)
Loans, net of unearned discount 20,572 16,730 3,842 4,377 (424) (111)
------------ --------------- ------------ ------------ ------------ ------------
Total interest income (1) $ 23,785 $ 20,224 $ 3,561 $ 4,172 $ (468) $ (143)
============ =============== ============ ============ ============ ============
Savings, NOW and money market deposits 3,020 2,670 350 223 117 10
Other time deposits 4,438 3,630 808 1,097 (222) (67)
Borrowed funds 1,089 809 280 349 (48) (21)
------------ --------------- ------------ ------------ ------------ ------------
Total interest expense 8,547 7,109 1,438 1,669 (153) (78)
------------ --------------- ------------ ------------ ------------ ------------
Net interest income $ 15,238 $ 13,115 $ 2,123 $ 2,503 $ (315) $ (65)
============ =============== ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
1998 COMPARED TO 1997 Increase Income/Expense Increase/(Decrease) dues 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 (19) (15)
Federal funds sold 437 401 36 52 (15) (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 809 380 429 492 (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>
(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
1999, for 1998 and 1997.
FUNDS MANAGEMENT ANALYSIS AND INTEREST RATE SENSITIVITY
The interest 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 ("FMC's")
whose goal is to ensure maximum returns within safe and sound risk parameters.
The FMC's 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 FMC's 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 FMC's 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, 1999 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 Greater
3 3-12 1-3 3-5 than
Months Months Years Years 5 Years Total
------------- ------------- -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Federal funds sold $ 4,730 $ - $ - $ - $ - $ 4,730
Investment securities - Debt (1) 5,692 758 1,008 30,414 5,879 43,751
Investment securities - Equity (1) - - - - 4,675 4,675
Loans and mortgages held-for-sale (1) 68,302 16,379 31,888 115,032 18,971 250,572
------------- ------------- -------------- ------------ ------------ ------------
Total Rate Sensitive Assets 78,724 17,137 32,896 145,446 29,525 303,728
------------- ------------- -------------- ------------ ------------ ------------
RATE SENSITIVE LIABILITIES:
Savings, NOW, and
money market deposits 32,826 32,948 42,010 11,525 - 119,309
Other time deposits 30,433 55,629 8,978 2,593 - 97,633
Borrowed funds 18,634 5,000 5,000 - - 28,634
------------- ------------- -------------- ------------ ------------ ------------
Total Rate Sensitive Liabilities 81,893 93,577 55,988 14,118 - 245,576
------------- ------------- -------------- ------------ ------------ ------------
INTEREST SENSITIVITY GAP:
Incremental $ (3,169) $ (76,440) $ (23,092) $ 131,328 $ 29,525 $ 58,152
============= ============= ============== ============ ============ ============
Cumulative $ (3,169) $ (79,609) $ (102,701) $ 28,627 $ 58,152
CUMULATIVE INTEREST SENSITIVE
GAP AS A PERCENTAGE OF
TOTAL EARNING ASSETS -1% -26% -34% 9% 19%
</TABLE>
(1) Loans and securities on a nonaccrual basis are not included as a part of
this analysis.
Table 3 shows the under-one-year net liability position at December 31,
1999 was ($79,609) (24.51% of total assets), compared to the under-one-year net
liability position of ($45,722) at December 31, 1998 (16.97% 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>
SECURITIES PORTFOLIO
The following table shows the Company's available-for-sale investment
securities' maturity distribution and corresponding tax-equivalent yields at
December 31, 1999:
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. Treasury securities $ - 0.00% $ 750 5.51% $ - 0.00% $ - 0.00%
U.S. Agency securities - 0.00% 30,300 6.38% - 0.00% 638 8.00%
States and political subdivisions 940 9.37% 1,013 7.71% 1,642 7.19% 4,116 7.74%
----------- --------- ----------- --------- ---------- --------- ----------- ---------
Total $ 940 9.37% $32,063 6.40% $ 1,642 7.19% $ 4,754 7.77%
=========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Amortized Yield
Cost (%)
----------- ---------
<S> <C> <C>
Collateralized mortgage obligations
and other mortgage-backed securities $ 5,700 5.65%
===========
Equity securities $ 4,818 6.26%
===========
</TABLE>
Of the $5,700 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>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial - Aircraft related $ 53,531 $ 26,617 $ 17,846 $ 9,154 $ 492
Commercial - Other 42,320 33,395 30,361 30,344 29,117
Secured by real estate - Construction 35,686 22,365 9,440 9,829 16,249
Secured by real estate - Farmland -- -- -- 62 64
Secured by real estate - Residential (1 to 4 family) 30,147 30,971 34,899 34,071 27,415
Secured by real estate - Residential (5 or more) 27,514 29,900 27,635 19,736 14,127
Secured by real estate - Non-residential 55,352 45,640 40,984 23,925 18,705
Consumer 5,169 6,207 5,087 3,948 5,039
--------- --------- --------- --------- ---------
Total loans 249,719 195,095 166,252 131,069 111,208
Less: Allowance for loan losses (3,114) (2,499) (2,010) (1,485) (1,402)
--------- --------- --------- --------- ---------
Total loans, net of allowance for loan losses $ 246,605 $ 192,596 $ 164,242 $ 129,584 $ 109,806
========= ========= ========= ========= =========
</TABLE>
14
<PAGE>
The commercial loan maturities and sensitivity to changes in interest rates
at December 31, 1999, 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 $ 36,469 $ 55,792 $ 3,590 $ 95,851
=========== ========== ========== =========
Interest rate sensitivity:
Fixed rate $ 6,895 $ 55,491 $ 3,158 $ 65,544
Variable rate 29,574 301 432 30,307
----------- ---------- ---------- ---------
Total $ 36,469 $ 55,792 $ 3,590 $ 95,851
=========== ========== ========== =========
</TABLE>
LIQUIDITY MANAGEMENT
A key element of the Company's FMC process is the management of liquidity.
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 included under Item 8 of
this Form 10-K.
The Company requires adequate liquidity to pay its expenses and 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
included under 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>
1999 1998 1997
-------------------- --------------------- -----------------
<S> <C> <C> <C>
Demand deposits $ 53,213 $ 47,062 $ 40,088
Savings, NOW & money market deposits 119,309 104,067 98,660
Other time deposits of $100 or less 60,661 55,021 44,409
-------------------- --------------------- -----------------
Core deposits 233,183 206,150 183,157
Other time deposits of $100 or more 36,972 19,884 14,975
Borrowed funds 28,634 18,097 10,037
-------------------- --------------------- -----------------
Total funding sources $ 298,789 $ 244,131 $ 208,169
==================== ===================== =================
</TABLE>
Total funding sources increased 22.39% at December 31, 1999 from prior year
levels. Core deposits increased 13.11% from December 31, 1998 balances while
other time deposits $100 or more grew at an 85.93% 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 included under 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 included under 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 $ 10,932
Over 3 through 6 months 12,258
Over 6 through 12 months 10,050
Over 12 months 3,732
--------------
$ 36,972
==============
</TABLE>
Borrowing facilities are available to the Subsidiary Banks through various
correspondent banks in the amount of $25,000. 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 $19,000 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, 1999, all entities exceeded regulatory established
minimums as defined for financial institutions. Please see Note 13 in the Notes
to Consolidated Financial Statements included under Item 8 of this Form 10-K.
Total shareholders equity decreased 0.50% to $22,524 at December 31, 1999.
Total equity as a percentage of assets was 6.94% at the end of 1999 versus 8.40%
a year earlier. Included in shareholders' equity is the net unrealized loss on
securities classified as available-for-sale, which amounted to $910 at the end
of 1999 against a gain of $253 as of the end of 1998.
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 general loan category. At
December 31, 1999, the allowance for loan losses was comprised of $1,869 and
$1,245 of allocated and unallocated reserves, respectively.
16
<PAGE>
TABLE 9
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 2,499 $ 2,010 $ 1,485 $ 1,402 $ 1,605
Loan charge-offs:
Commercial - Other 263 130 12 256 403
Real estate - Residential (1 to 4 family) 105 - 1 - 18
Real estate - Residential (5 or more) - - - 607 66
Real estate - Non-Residential - - - - 460
Consumer 25 25 15 33 1
------------- ------------- ------------- ------------- -------------
Total charge-offs 393 155 28 896 948
Recoveries:
Commercial - Other 116 64 55 62 25
Real estate - Residential (5 or more) - - 86 - -
Consumer 7 - 2 3 3
------------- ------------- ------------- ------------- -------------
Total recoveries 123 64 143 65 28
Net charge-offs (recoveries) 270 91 (115) 831 920
Provision for loan losses 885 580 410 914 717
------------- ------------- ------------- ------------- -------------
Balance at end of year $ 3,114 $ 2,499 $ 2,010 $ 1,485 $ 1,402
============= ============= ============= ============= =============
As a percent of average loans:
Net loan charge-offs (recoveries) 0.12% 0.05% (0.08%) 0.69% 0.86%
Provision for loan losses 0.39% 0.33% 0.28% 0.76% 0.67%
Allowance for loan losses
as a percentage of net loans: 1.25% 1.28% 1.21% 1.13% 1.26%
Allocation of allowance:
Commercial - Aircraft related 588 426 268 137 5
Commercial - Other 609 684 772 765 841
Secured by real estate 621 377 11 222 274
Consumer 51 89 89 107 102
Unallocated 1,245 923 870 254 180
------------- ------------- ------------- ------------- -------------
Balance at end of year $ 3,114 $ 2,499 $ 2,010 $ 1,485 $ 1,402
============= ============= ============= ============= =============
Loan balance as a percent of total loans:
Commercial - Aircraft related 21% 14% 11% 7% 0%
Commercial - Other 17% 17% 18% 23% 26%
Secured by real estate 60% 66% 68% 67% 69%
Consumer 2% 3% 3% 3% 5%
</TABLE>
As indicated by this table, the provision for loan losses amounted to $885
for 1999 compared to $580 in 1998 and $410 in 1997. This increase in the 1999
provision is due to the continued growth in the Company's loan portfolio.
The allowance for loan losses amounted to $3,114 for 1999 compared to
$2,499 in 1998 and $2,010 in 1997. 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>
NONPERFORMING ASSETS
One measurement used by management in assessing the risk inherent in the
loan portfolio is the level of nonperforming assets. Nonperforming assets
consist of both nonaccrual loans, investments and other real estate owned.
Nonaccrual loans are those loans which have been determined to have reasonable
doubt as to the timely collectibility of interest or principal. Other real
estate owned ("OREO") represents real property which has been acquired through
foreclosure or real estate which a Subsidiary Bank has obtained possession of in
satisfaction of a debt. OREO is carried at the lower of the recorded investment
value of the loan or the estimated fair market value, less estimated disposal
costs, of the related real estate. Past due loans are loans whose principal and
interest payments are delinquent 90 days or more and are still accruing
interest.
The following table summarizes nonperforming assets and past due loans for
the past five years as well as certain information related to interest income on
nonaccrual loans:
TABLE 10
ANALYSIS OF NONPERFORMING ASSETS AND PAST DUE LOANS
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 849 $1,234 $ 252 $1,158 $2,369
Restructured loans 58 75 896 954 1,430
------ ------ ------ ------ ------
Total nonperforming loans 907 1,309 1,148 2,112 3,799
Nonperforming securities, at market -- -- -- 134 134
Other real estate owned -- -- 334 334 1,343
------ ------ ------ ------ ------
Total nonperforming assets $ 907 $1,309 $1,482 $2,580 $5,276
====== ====== ====== ====== ======
Percentage of nonperforming loans/loans,
net of deferred fees 0.36% 0.67% 0.69% 1.61% 3.42%
Percentage of nonperforming assets/total assets 0.28% 0.49% 0.64% 1.14% 2.56%
Past due loans, not included above $ -- $ -- $ -- $ 5 $ 4
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
nonaccrual status of loans $ 60 $ 164 $ 64 $ 282 $ 419
</TABLE>
Nonperforming assets have decreased for four consecutive years and have
reached their lowest level in 15 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, 1999, nonperforming
assets totaled $907, a $402 decrease from 1998. As a result, the percentage of
nonperforming assets to total assets was reduced 42.86% to 0.28%.
NONINTEREST INCOME
Noninterest income consists primarily of service charges on customer
deposit accounts and fees earned from mortgage banking activities. Total
noninterest income increased 1.87% to $3,213 in 1999 compared to 1998. The
continued improvement in noninterest income reflects the continued
diversification of our sources of revenue in addition to normal increases
related to growth. The following table analyzes the various sources of
noninterest income for the years ended December 31, 1997 through 1999.
18
<PAGE>
TABLE 11
NONINTEREST INCOME COMPONENTS
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1999 1998 1997
------------ -------------- --------------
<S> <C> <C> <C>
Service charges on deposit accounts $ 1,784 $ 1,481 $ 1,215
Mortgage banking fees 831 1,258 907
Other noninterest income 510 317 475
Net gains from sale of loans 87 126 177
Net gain (loss) on securities 1 (28) (107)
------------ -------------- --------------
Total noninterest income $ 3,213 $ 3,154 $ 2,667
------------ -------------- --------------
------------ -------------- --------------
</TABLE>
Service charges on deposit accounts, the largest component of noninterest
income, consists of fees on both interest bearing and noninterest bearing
deposit accounts and charges for items such as insufficient funds, overdrafts
and stop payment requests. These charges increased 20.46% in 1999 over 1998
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 those
mortgage loans which it sells. Mortgage banking fee income of $831, a decrease
of 33.94%, was recognized in 1999 along with interest income of $86. As of
December, 1999, the mortgage banking division of Heritage was sold. Heritage
will continue to offer a variety of residential mortgage products.
Net gain (loss) on securities result from the sale of securities from the
investment portfolio. For a review of gains and losses related to the investment
portfolio, see Note 3 in the Notes to Consolidated Financial Statements included
under Item 8 of this Form 10-K.
NONINTEREST EXPENSE
Total noninterest expense increased $1,409 or 11.80%, in 1999 after
increasing $1,180, or 10.97% in 1998. This is reflective of the incremental
increase in salaries and benefits that result from the necessary staffing
increases due to the loan and deposit growth pattern as well as a new branch
facility. In addition, staffing was increased in connection with 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.
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, 1999, the Company had a 73% efficiency ratio as compared
to 74% for the prior year's period. The following table analyzes the various
components of noninterest expense for the years ended December 31, 1997 through
1999.
19
<PAGE>
TABLE 12
NONINTEREST EXPENSE COMPONENTS
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1999 1998 1997
----------------- ---------------- -----------------
<S> <C> <C> <C>
Salaries and employee benefits:
Core bank employees $ 6,742 $ 6,003 $ 5,432
Mortgage lending group 761 911 666
----------------- ---------------- -----------------
Total 7,503 6,914 6,098
----------------- ---------------- -----------------
Net occupancy expense 627 647 680
Equipment expense 815 811 579
Outside fees and services 873 703 979
Advertising and business
development expense 447 406 316
Supplies and postage expense 451 389 346
Data processing expense 1,080 659 271
Regulatory services/fees 115 95 98
Other operating expense 1,438 1,316 1,393
----------------- ---------------- -----------------
Total noninterest expense $ 13,349 $ 11,940 $ 10,760
----------------- ---------------- -----------------
----------------- ---------------- -----------------
</TABLE>
An increase of $820 was recognized in noninterest expense other than
salaries and employee benefits, from $5,026 at December 31, 1998 to $5,846 at
December 31, 1999. The increase in data processing expense resulted from a full
operating year of a new LAN/WAN network along with the outsourcing of data
processing for Uptown. Management continues to focus on cost containment and
this control of expenses remains a priority as a part of our broader goal of
maximizing long-term profitability.
FORWARD LOOKING STATEMENTS
Statements made about the Company's future economic performance, strategic
plans or objectives, revenue or earnings projections, or other financial items
and similar statements are not guarantees of future performance, but are forward
looking statements. By their nature, these statements are subject to numerous
uncertainties that could cause actual results to differ materially from those in
the statements. Important factors that might cause the Company's actual results
to differ materially include, but are not limited to, the following:
- Federal and state legislative and regulatory developments;
- Changes in management's estimate of the adequacy of the allowance for
loan losses (and/or other significant estimates such as OREO, deferred
tax valuation allowance, etc.);
- Changes in the level and direction of loan delinquencies and
write-offs;
- Interest rate movements and their impact on customer behavior and
Upbancorp's net interest margin;
- The impact of repricing and competitors' pricing initiatives on loan
and deposit products;
- Upbancorp's ability to adapt successfully to technological changes to
meet customers' needs and developments in the marketplace;
- Upbancorp's ability to access cost effective funding;
- Economic conditions;
- Year 2000 related complications and
- Recently enacted financial modernization legislation.
20
<PAGE>
YEAR 2000 COMPLIANCE
We have tested our products and believe that they are year 2000 compliant.
We have also inquired of significant vendors of our internal systems as to their
year 2000 readiness and have tested our material internal systems. We believe
that, based on these tests and assurances of our vendors, we will not incur
material costs to resolve year 2000 issues for our products and internal
systems. Furthermore, to date we have not experienced any year 2000 problems and
our customers or vendors have not informed us of any material year 2000
problems. If it comes to our attention that there are any year 2000 problems
with our products or that some of our third-party hardware and software used in
our internal systems are not year 2000 compliant, then we will endeavor to make
modifications to our products and internal systems, or purchase new internal
systems, to quickly respond to the problem. The costs already incurred by us to
date related to year 2000 compliance are not material, and we do not anticipate
incurring additional material costs related to year 2000 compliance.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ON MARKET RISK
While Table 3, illustrated on page 13 is a useful tool for management to
assess the general positioning of the Company's balance sheet, management uses
an additional measurement tool to evaluate its asset/liability sensitivity which
determines exposure to changes in interest rates by measuring the change in net
interest income as a percentage of Capital, due to changes in rates over a
one-year time horizon.
Management measures such change assuming an immediate and sustained
parallel shift in rates of 50, 100 and 200 basis points, both upward and
downward. The model uses scheduled amortization, call date or final maturity as
appropriate on all non-rate sensitive assets. The model uses repricing frequency
on all variable rate assets and liabilities, it also uses a 5-year decay
analysis on all non-rate sensitive deposits. Prepayment rates on fixed rate
loans have been adjusted up or down by 10% per year to incorporate historical
experience in both an up-rate and down-rate environment. Utilizing this
measurement concept, the interest rate risk of the Company, expressed as change
in net interest income as a percentage of capital over a 1-year time horizon due
to changes in interest rates, at December 31, 1999 and 1998, was as follows:
<TABLE>
<CAPTION>
Basis Point Change
-------------------------------------------------------------------------------
+200 +100 +50 -50 -100 -200
---------- --------- ---------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1999 -0.96% -0.49% -0.36% 0.35% 0.43% -0.21%
At December 31, 1998 0.81% 0.40% 0.19% -0.19% -0.26% -1.53%
</TABLE>
21
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
UPBANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 11,526 $ 9,165
Federal funds sold 4,730 10,000
Securities available for sale 48,426 42,179
Securities held to maturity
(Fair value of $200 in 1998) -- 200
Mortgages held-for-sale 1,264 4,067
Loans, net of allowance for loan losses of
$3,114 and $2,499 in 1999 and 1998 246,605 192,596
Premises and equipment, net 6,002 6,349
Accrued interest and other assets 6,224 4,906
--------- ---------
TOTAL ASSETS $324,777 $269,462
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Demand deposits $ 53,213 $ 47,062
Savings, NOW and money market deposits 119,309 104,067
Other time deposits 97,633 74,905
---------- ---------
Total deposits 270,155 226,034
Borrowed funds 28,634 18,097
Accrued interest and other liabilities 3,464 2,693
---------- ---------
Total Liabilities 302,253 246,824
---------- ---------
SHAREHOLDERS' EQUITY
Common stock, $1 par value: 3,000,000 shares authorized;
1,000,000 issued in 1999 and 1998 1,000 1,000
Additional paid in capital 4,500 4,500
Retained earnings 20,954 18,823
Treasury stock - 162,692 shares in 1999 and 130,004 in 1998 (3,020) (1,938)
Accumulated other comprehensive income (loss) (910) 253
---------- ---------
TOTAL SHAREHOLDERS' EQUITY 22,524 22,638
---------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $324,777 $269,462
---------- ---------
---------- ---------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
22
<PAGE>
UPBANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 20,572 $16,730 $13,852
Interest on mortgages held-for-sale 86 118 83
Interest on federal funds sold 209 437 401
Interest on investments:
Taxable 2,309 2,540 3,263
Non-taxable 354 215 123
--------- --------- ---------
Total interest income 23,530 20,040 17,722
--------- --------- ---------
INTEREST EXPENSE
Interest on savings, NOW, and money market deposits 3,020 2,670 2,577
Interest on other time deposits 4,438 3,630 3,158
Interest on borrowed funds 1,089 809 380
--------- --------- ---------
Total interest expense 8,547 7,109 6,115
--------- --------- ---------
NET INTEREST INCOME 14,983 12,931 11,607
PROVISION FOR LOAN LOSSES 885 580 410
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 14,098 12,351 11,197
--------- --------- ---------
NONINTEREST INCOME
Service charges on deposit accounts 1,784 1,481 1,215
Mortgage banking fees 831 1,258 907
Other noninterest income 510 317 475
Net gains from sale of loans 87 126 177
Net gain (loss) on securities 1 (28) (107)
--------- --------- ---------
Total noninterest income 3,213 3,154 2,667
--------- --------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits 7,503 6,914 6,098
Net occupancy expense 627 647 680
Equipment expense 815 811 579
Outside fees and services 873 703 979
Advertising and business development expenses 447 406 316
Supplies and postage expense 451 389 346
Data processing expense 1,080 659 271
Regulatory services/fees 115 95 98
Other operating expense 1,438 1,316 1,393
--------- --------- ---------
Total noninterest expense 13,349 11,940 10,760
--------- --------- ---------
INCOME BEFORE INCOME TAXES 3,962 3,565 3,104
Income taxes 1,385 1,265 1,127
--------- --------- ---------
NET INCOME $ 2,577 $ 2,300 $ 1,977
--------- --------- ---------
--------- --------- ---------
Basic earnings per share $3.00 $2.63 $2.24
--------- --------- ---------
--------- --------- ---------
Weighted average shares outstanding 859,710 875,907 882,800
--------- --------- ---------
--------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
23
<PAGE>
UPBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,577 $ 2,300 $ 1,977
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 885 580 410
Depreciation and amortization 1,282 1,107 965
Net gain (loss) on securities (1) 28 107
Net gains on sale of mortgage loans (87) (126) (177)
Net gains on sale of other real estate owned - (52) -
Change in deferred income taxes (541) (179) 171
Accretion on investment securities, net (258) (118) (342)
Originations of mortgages held-for-sale (48,941) (77,169) (38,262)
Proceeds from sales of mortgages held-for-sale 51,831 75,374 37,294
Changes in assets and liabilities:
Increase in accrued interest and other assets (120) (289) (17)
Increase in accrued interest and other liabilities 771 485 532
---------- ---------- ---------
Net cash provided by operating activities 7,398 1,941 2,658
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in federal funds sold 5,270 (9,500) 9,050
Purchases of available-for-sale securities (40,670) (23,853) (23,803)
Proceeds from maturities and redemptions
of available-for-sale securities 10,479 15,330 27,319
Proceeds from sale of available-for-sale securities 22,297 14,239 16,150
Purchases of held-to-maturity securities - - (200)
Proceeds from maturities and
redemptions of held-to-maturity securities 200 - -
Net increase in loans (54,894) (28,934) (35,068)
Purchases of premises and equipment (849) (1,728) (1,097)
Purchase of airplane financing division - (460) -
Proceeds from sale of other real estate - 386 -
---------- ---------- ---------
Net cash used in investing activities (58,167) (34,520) (7,649)
---------- ---------- ---------
Cash Flows from Financing Activities:
Net increase in total deposits 44,121 27,902 2,830
Net increase (decrease) in borrowed funds 10,537 8,060 (524)
Cash dividends paid (446) (438) (441)
Purchase of treasury stock (1,082) (458) -
---------- ---------- ---------
Net cash provided by financing activities 53,130 35,066 1,865
---------- ---------- ---------
Net increase (decrease) in cash and due from banks 2,361 2,487 (3,126)
Cash and due from banks at beginning of period 9,165 6,678 9,804
---------- ---------- ---------
Cash and due from banks at end of period $ 11,526 $ 9,165 $ 6,678
---------- ---------- ---------
---------- ---------- ---------
Supplemental disclosure of cash flow information:
Cash payments: Interest $ 8,172 $ 7,017 $ 5,936
Income taxes 1,901 1,642 826
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
24
<PAGE>
UPBANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid In Retained Treasury Comprehensive
Stock Capital Earnings Stock Income (loss) Total
------ --------- -------- -------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 ............... $ 1,000 $ 4,500 $15,425 $(1,480) $ (589) $18,856
------- ------- ------- ------- ------- -------
Comprehensive Income (loss):
Net income ............................. 1,977 1,977
Net unrealized gain (loss) on securities
available-for-sale, net of tax of $388 . 608 608
-------
Comprehensive Income (loss) .......... 2,585
-------
Cash dividends: $.50 per share ......... (441) (441)
------- ------- ------- ------- ------- -------
BALANCE, DECEMBER 31, 1997 ............... $ 1,000 $ 4,500 $16,961 $(1,480) $ 19 $21,000
------- ------- ------- ------- ------- -------
Comprehensive Income (loss):
Net income ............................. 2,300 2,300
Net unrealized gain (loss) on securities
available-for-sale, net of tax of $149 . 234 234
-------
Comprehensive Income (loss) .......... 2,534
-------
Cash dividends: $.50 per share ......... (438) (438)
Purchase of treasury stock ............. (458) (458)
------- ------- ------- ------- ------- -------
BALANCE, DECEMBER 31, 1998 ............... $ 1,000 $ 4,500 $18,823 $(1,938) $ 253 $22,638
------- ------- ------- ------- ------- -------
Comprehensive Income (loss):
Net income ............................. 2,577 2,577
Net unrealized gain (loss) on securities
available-for-sale, net of tax of ($743) (1,163) (1,163)
-------
Comprehensive Income (loss) .......... 1,414
-------
Cash dividends: $.52 per share ......... (446) (446)
Purchase of treasury stock ............. (1,082) (1,082)
------- ------- ------- ------- ------- -------
BALANCE, DECEMBER 31, 1999 ............... $ 1,000 $ 4,500 $20,954 $(3,020) $ (910) $22,524
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</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, 1999, 1998 AND 1997
(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 six banking offices and one loan production offices in northern Chicago
and metropolitan Phoenix. Both Subsidiary Banks are engaged in the general
commercial banking business in addition to offering a complete range of retail
banking services. The Subsidiary Banks conduct general banking business which
embraces all of
25
<PAGE>
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
three facilities, which are leased.
In February, 2000, Uptown applied to the Office of the Comptroller of the
Currency ("OCC") to merge Heritage with and into and under the charter of
Uptown. Following the consummation of the merger, the offices of Heritage will
operate as branches of Uptown. Heritage will retain its name in the Phoenix
area.
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.
Based on the Company's approach to decision making, it has decided that its
business is comprised of a single segment and that Statement of Financial
Accounting Standards 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.
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.
26
<PAGE>
MORTGAGES HELD-FOR-SALE:
The Company routinely sells to investors its originated residential
mortgage loans and retains no servicing rights relating to these mortgages sold.
Mortgage activity includes both mortgages held-for-sale which are 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. 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.
Interest is accrued daily on the outstanding balances. The accrual of
interest is discontinued on loans past due 90 days or more. For impaired loans,
accrual of interest is discontinued when management believes, after considering
collection efforts and other factors, that the borrower's financial condition is
such that collection of interest is doubtful. Interest income on these loans is
recognized to the extent interest payments are received and the principal is
considered fully collectible.
A loan is impaired when it is probable the Subsidiary Bank will be unable
to collect all contractual principal and interest payments due in accordance
with the terms of the loan agreement. Impaired loans are measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or at the fair value of the collateral if the loan is collateral
dependent. When the measure of the impaired loan is less than the recorded
investment in the loan, the impairment, as well as any subsequent changes, is
recorded through a valuation allowance included in the allowance for loan
losses. The Company considers consumer loans and residential real estate loans
to be smaller homogeneous loans that are not considered as impaired loans. All
other loan types are accounted for as impaired loans when they meet the above
criteria.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb estimated losses on existing loans, based on an evaluation of the
collectibility of loans and prior loss experience. This evaluation also takes
into consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrower's ability to pay. While
management uses the best information available to make its evaluation, future
adjustments to the allowance may be necessary if there are significant changes
in economic conditions. In addition, various regulatory agencies periodically
review the allowance for loan losses. These agencies may require the Banks to
make additions to the allowance for loan losses based on their judgments of
collectibility after reviewing the information available to them at the time of
their examination.
27
<PAGE>
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed principally by the straight-line method over their
estimated useful lives.
INTANGIBLE ASSETS:
Intangible assets consist of goodwill and other intangible assets which are
being amortized on a straight-line basis over estimated lives of 3 to 15 years.
Intangible assets, net of accumulated amortization, are included in other assets
in the consolidated statements of condition.
INCOME TAXES:
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
EARNINGS PER COMMON SHARE:
Basic earnings per share is computed by dividing net income for the year by
the average number of shares outstanding during the year. Dilutive earnings per
share do not differ from basic earnings per share.
STOCK SPLIT:
Effective October 20, 1998, the Company increased its authorized shares of
common stock from 300,000 to 3,000,000 and reduced the par value from $10 to $1.
In addition, the common stock was split on a four-to-one basis. All references
in the accompanying financial statements to number of shares and per share
amounts have been retroactively restated to reflect these changes.
RECLASSIFICATIONS:
Certain amounts in the 1998 and 1997 consolidated financial statements have
been reclassified to conform with the 1999 presentation. Such reclassifications
have no effect on previously reported net income.
EMERGING ACCOUNTING STANDARDS:
In June, 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
(FAS 133). FAS 133 requires companies to record derivatives on the balance sheet
as assets or liabilities at fair value. Depending on the use of the derivative
and whether it qualifies for hedge accounting, gains or losses resulting from
changes in the values of those derivatives would either be recorded as a
component of net income or as a change in stockholder's equity. In June 1999,
the FASB issued FAS 137 which deferred the effective date of FAS 133 to fiscal
years beginning after June 15, 2000. Management does not anticipate that the
adoption of the new Statement will have a significant effect on the Company's
earnings or financial position.
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 $2,380 and $2,047 at December
31, 1999 and 1998.
28
<PAGE>
NOTE 3. SECURITIES
The Company had no HELD-TO-MATURITY securities at December 31, 1999. The
amortized cost and fair value of securities HELD-TO-MATURITY at December 31,
1998 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $200 $-- $-- $200
=============== =============== =============== ===============
</TABLE>
The amortized cost and fair value of securities AVAILABLE-FOR-SALE are as
follows at December 31:
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 750 $ -- $ 7 $ 743
U.S. Government agencies 30,938 -- 678 30,260
States and political
subdivisions 7,711 44 495 7,260
Mortgage-backed securities 5,700 -- 212 5,488
Equity securities 4,818 1 144 4,675
------- ------- ------- -------
Total securities available-for-sale $49,917 $ 45 $ 1,536 $48,426
======= ======= ======= =======
</TABLE>
<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>
The amortized cost and fair value of securities AVAILABLE-FOR-SALE at
December 31, 1999, 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. Equity securities have no stated maturity. Therefore,
neither type of these securities is 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 $940 $961
Due after one year through five years 32,063 31,422
Due after five years through ten years 1,642 1,586
Due after ten years 4,754 4,294
Equity securities 4,818 4,675
Mortgage-backed securities 5,700 5,488
--------------- --------------
Total $49,917 $48,426
=============== ==============
</TABLE>
29
<PAGE>
Gross gains realized were $37 in 1999, $15 in 1998 and $19 in 1997. Gross
losses realized were $36 in 1999, $43 in 1998 and $126 in 1997.
Investment securities carried at approximately $30,682 and $26,515 at
December 31, 1999 and 1998, 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>
1999 1998
--------- ---------
<S> <C> <C>
Commercial - Aircraft related $ 53,531 $ 26,617
Commercial - Other 42,320 33,395
Secured by real estate - Construction 35,686 22,365
Secured by real estate - Residential (1 to 4 family) 30,147 30,971
Secured by real estate - Residential (5 or more) 27,514 29,900
Secured by real estate - Non-residential 55,352 45,640
Consumer 5,169 6,207
--------- ---------
Total loans 249,719 195,095
Less: Allowance for loan losses (3,114) (2,499)
--------- ---------
Total loans, net of allowance for loan losses $ 246,605 $ 192,596
========= =========
</TABLE>
Changes in the allowance for loan losses account during the years ended
December 31, 1999, 1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning of year $ 2,499 $ 2,010 $ 1,485
Provision for loan losses 885 580 410
Loans charged-off (393) (155) (28)
Recoveries on loans previously charged-off 123 64 143
------- ------- -------
Balance at end of year $ 3,114 $ 2,499 $ 2,010
======= ======= =======
</TABLE>
As of December 31, 1999 and 1998, the Company's recorded investment in
impaired loans and the related valuation allowance are as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------- ----------------------------
Carrying Valuation Carrying Valuation
Value Allowance Value Allowance
-------------- ------------ --------------- -----------
<S> <C> <C> <C> <C>
Impaired loans
Valuation allowance required $ -- $-- $ -- $--
No valuation allowance required 849 -- 1,234 --
------ ---- ------ ----
Total impaired loans $ 849 $-- $1,234 $--
====== ==== ====== ====
</TABLE>
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, 1999 and 1998, was $795 and $402, respectively. No interest income
was recognized in 1999 and 1998 on impaired loans.
30
<PAGE>
NOTE 5. PREMISES AND EQUIPMENT
The following is a summary of bank premises and equipment at December 31:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Land $ 1,106 $ 1,106
Buildings and improvements 12,660 12,474
Furniture, fixtures and equipment 7,669 7,318
-------- --------
Total cost 21,435 20,898
Accumulated depreciation (15,433) (14,549)
-------- --------
$ 6,002 $ 6,349
======== ========
</TABLE>
Depreciation expense on premises and equipment totaled $1,196, $1,054, and
$923 for 1999, 1998 and 1997, respectively.
The buildings, in which the main facilities of each bank are located, have
stores and offices which are rented. Total rent received was $1,132, $1,037 and
$974 in 1999, 1998 and 1997, 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
$36,972 and $19,884 at December 31, 1999 and 1998.
Maturities of other time deposits are summarized as follows at December 31:
<TABLE>
<CAPTION>
1999
--------------
<S> <C>
2000 $85,691
2001 5,908
2002 3,256
2003 2,357
2004 421
-------
$97,633
=======
</TABLE>
NOTE 7. BORROWED FUNDS
At December 31, 1999 and 1998, borrowed funds consisted of :
<TABLE>
<CAPTION>
1999 1998
--------- -----------
<S> <C> <C>
Federal Home Loan Bank borrowing, due October 5, 2008, 4.20%, fixed rate $ 5,000 $ 5,000
Federal Home Loan Bank borrowing, due January 20, 2008, 5.05%, fixed rate 5,000 5,000
Federal Home Loan Bank borrowing, due July 3, 2000, variable rate 4,000 4,000
Federal Home Loan Bank borrowing, due May 1, 2000, 5.93%, fixed rate 5,000 --
Federal Home Loan Bank borrowing, due July 25, 2003, variable rate -- 4,000
Federal funds purchased 9,000 --
Securities sold under agreements to repurchase and
U.S. Treasury tax and loan note accounts 634 97
------- -------
Total $28,634 $18,097
======= =======
</TABLE>
31
<PAGE>
Uptown has an arrangement with the Federal Home Loan Bank of Chicago
whereby the FHLB will make advances to the Bank with repayment terms from
overnight to ten years. The Bank is eligible to obtain credit up to 20 times the
member Bank's holding of Federal Home Loan Capital Stock; these eligible
borrowings amount to $19,000.
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
The Company has a defined benefit plan covering substantially all
employees. The plan is based on years of service and the employee's average
compensation during all years of employment. The Company's funding policy is to
meet the minimum funding requirements set forth in the Employee Retirement
Income Security Act of 1974 ("ERISA"), plus additional amounts as appropriate.
In addition, the Company adopted a Supplemental Executive Retirement Plan (the
"SERP") for certain executive officers, effective February 17, 1998.
The following table provides a reconciliation of the changes in the Plans'
benefit obligations and fair value of assets over the two year period ended
December 31, 1999 and a statement of the Plans' funded status as of December 31
of both years:
<TABLE>
<CAPTION>
Pension Benefits
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of benefit obligation:
Net obligation at beginning of the year 7,231 5,546
Service cost 372 307
Interest cost 493 446
Plan amendments -- 658
Actuarial (gain) loss (1,370) 587
Gross Benefits paid (331) (313)
------ ------
Net obligation at end of the year 6,395 7,231
====== ======
Reconciliation of fair value of plan assets:
Fair value of plan assets at beginning year 7,924 7,845
Actual return on plan assets 690 392
Gross benefits paid (331) (313)
------ ------
Fair value of plan assets at end of the year 8,283 7,924
====== ======
Funded status:
Funded status at end of the year 1,888 693
Unrecognized transition (asset) obligation -- --
Unrecognized prior service cost 646 715
Actuarial gain/(loss) (1,389) 13
------ ------
Net amount recognized 1,145 1,421
====== ======
</TABLE>
The net amount recognized is recorded in the financial statements in other
assets.
As of December 31, 1999, the benefit obligations of the defined benefit
plan and the SERP were $5,709 and $686, respectively, and the fair value of plan
assets of the defined benefit plan and the SERP were $8,283 and $-0-,
respectively.
32
<PAGE>
The following table provides the components of net periodic benefit cost
for the plans fiscal years 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Pension Benefits
-----------------------------------------------------
1999 1998 1997
--------------- --------------- --------------
<S> <C> <C> <C>
Service cost 372 307 249
Interest cost 493 446 377
Expected return on plan assets (660) (654) (532)
Amortization of transition obligation (asset) -- (53) (133)
Amortization of prior service cost 70 70 6
Actuarial gain(loss) -- (6) --
---- ---- ----
Net periodic benefit cost 275 110 (33)
==== ==== ====
</TABLE>
The assumptions used in the measurement of the Company's benefit obligation
are shown in the following table:
<TABLE>
<CAPTION>
Pension Benefits
---------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Weighted average assumptions as of December 31:
Discount rate 8.00% 6.50%
Expected return on plan assets 8.50% 8.50%
Rate of compensation increase 5.00% 5.00%
</TABLE>
NOTE 9. INCOME TAXES
The provision for income taxes for the years ended December 31, 1999, 1998
and 1997 is comprised of the following amounts:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- -------------- --------------
<S> <C> <C> <C>
Current:
Federal $ 1,733 $ 1,289 $ 827
State 193 155 129
Deferred: (541) (179) 171
------- ------- -------
Total tax provision $ 1,385 $ 1,265 $ 1,127
======= ======= =======
</TABLE>
The components of the net deferred tax assets which are included in other
assets, are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Deferred Tax Assets
Allowance for loan losses and other real estate owned $ 906 $ 570
Depreciation 695 603
Interest on non-accrual loans 50 26
Deferred loan fees 4 8
Securities available-for-sale 582 --
------ ------
Gross deferred tax assets 2,237 1,207
------ ------
Deferred Tax Liabilities
Pension expense 524 646
Discount accretion 29 32
Securities available-for-sale -- 161
Other 75 43
------ ------
Gross deferred tax liabilities 628 882
------ ------
Net deferred tax assets $1,609 $ 325
====== ======
</TABLE>
33
<PAGE>
Management has determined that a valuation allowance is not required at
December 31, 1999 and 1998.
The following table reconciles the statutory Federal income tax rate with
the effective income tax as a percent of pretax income.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
Federal income tax as statutory rate 35.0% 35.0% 35.0%
Tax-exempt interest (4.2)% (3.4)% (2.4)%
Graduated tax rate (1.0)% (1.0)% (1.0)%
State tax 3.2% 2.9% 2.8%
Other, net 2.0% 2.0% 1.9%
----------- ---------- --------
Effective income tax rate 35.0% 35.5% 36.3%
=========== ========== =========
</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, 1999 and 1998 was $3,466 and $2,805,
respectively. These loans were made using the same criteria and at interest
rates and terms that would be comparable to loans granted to a borrower who is
not an executive officer or director. During 1999, new loans and advances to
such related parties amounted to $3,410 and repayments amounted to $2,749.
NOTE 11. COMMITMENTS, CONTINGENCIES AND CREDIT RISK
The Subsidiary Banks are parties to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of their
customers. These financial instruments include commitments to extend credit and
standby letters of credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the balance sheet.
The contract amounts of these instruments reflect the extent of involvement a
bank has in particular classes of financial instruments.
The Subsidiary 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 Subsidiary 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 Subsidiary Banks evaluate each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary by the Subsidiary 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
Subsidiary 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 Subsidiary 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.
34
<PAGE>
<TABLE>
<CAPTION>
Contract Amount
-------------------------------
Off - balance sheet financial instruments 1999 1998
-------------- ------------
<S> <C> <C>
Commitments to extend credit $90,374 $68,792
Letters of credit:
Standby 253 340
Commercial 2,064 1,149
</TABLE>
The Company leases certain office facilities under various operating lease
agreements that provide for payment of taxes, insurance and maintenance costs.
These leases generally include renewal options. The future minimum rental
commitments at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Premises
-------------
<S> <C>
2000 $ 241
2001 247
2002 251
2003 163
2004 68
2005 and thereafter 222
-------------
Total minimum payments $ 1,192
=============
</TABLE>
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, 1999, loans to customers in Arizona were approximately $61 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, 1999, the Company's loan portfolio included $53,531 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, 1999, $2,529 of Uptown earnings 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.
35
<PAGE>
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, 1999.
At December 31, 1999, 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, 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.
36
<PAGE>
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, 1999: Amount Ratio Amount Ratio Amount Ratio
- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to risk-weighted assets)
Consolidated $25,905 10.0% $20,789 8.0% $ -- --
Uptown National Bank 19,894 10.1% 15,738 8.0% 19,672 10.0%
Heritage Bank 5,994 9.3% 5,140 8.0% 6,425 10.0%
Tier 1 Capital (to risk-weighted assets)
Consolidated 22,792 8.8% 10,394 4.0% -- --
Uptown National Bank 17,645 9.0% 7,869 4.0% 11,803 6.0%
Heritage Bank 5,190 8.1% 2,570 4.0% 3,855 6.0%
Leverage (Tier 1 to average assets)
Consolidated 22,792 7.1% 12,798 4.0% -- --
Uptown National Bank 17,645 7.0% 10,088 4.0% 12,610 5.0%
Heritage Bank 5,190 7.2% 2,899 4.0% 3,624 5.0%
As of December 31, 1998:
- ------------------------
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%
</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.
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.
37
<PAGE>
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>
1999 1998
--------------------------------- ----------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks $11,526 $11,526 $9,165 $9,165
Federal fund sold 4,730 4,730 10,000 10,000
Securities available-for-sale 48,426 48,426 42,179 42,179
Securities held-to-maturity -- -- 200 200
Loans, net of unearned discount and
mortgages held-for-sale 250,983 251,358 198,562 205,482
Accrued interest receivable 1,876 1,876 1,632 1,632
FINANCIAL LIABILITIES
Deposits $270,155 $271,483 $226,034 $229,750
Borrowed funds 28,634 28,634 18,097 18,097
Accrued interest payable 1,237 1,237 862 862
</TABLE>
38
<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) 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 129 $ 1,739
Investment in subsidiary banks 22,567 20,903
Other 235 206
------------------ --------------------
TOTAL ASSETS $ 22,931 $ 22,848
================== ====================
LIABILITIES
Dividend declared $ 109 $ 109
Other liabilities 298 101
------------------ --------------------
TOTAL LIABILITIES $ 407 $ 210
------------------ --------------------
SHAREHOLDERS' EQUITY
Common stock - $1 par value $ 1,000 $ 1,000
Additional paid in capital 4,500 4,500
Retained earnings 20,954 18,823
Treasury stock (3,020) (1,938)
Accumulated other comprehensive income (loss) (910) 253
------------------ --------------------
TOTAL SHAREHOLDERS' EQUITY $ 22,524 $ 22,638
------------------ --------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 22,931 $ 22,848
================== ====================
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended December 31, (DOLLARS IN THOUSANDS) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends received from
bank subsidiaries $ 135 $ 2,151 $ 1,736
Interest on short term investments 44 18 25
-------------- --------------- ------------
Total Income 179 2,169 1,761
-------------- --------------- ------------
EXPENSE
Salaries and employee benefits 519 365 435
Other expense 145 187 132
-------------- --------------- ------------
Total Expense 664 552 567
-------------- --------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
UNDISTRIBUTED INCOME OF SUBSIDIARIES (485) 1,617 1,194
Income tax benefit 235 205 140
-------------- --------------- ------------
INCOME (LOSS) BEFORE UNDISTRIBUTED INCOME
OF SUBSIDIARIES (250) 1,822 1,334
Undistributed income of subsidiaries 2,827 478 643
-------------- --------------- ------------
NET INCOME $ 2,577 $ 2,300 $ 1,977
============== =============== ============
</TABLE>
39
<PAGE>
NOTE 15. UPBANCORP, INC. - PARENT ONLY
FINANCIAL STATEMENTS
(Continued)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31, (DOLLARS IN THOUSANDS) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,577 $ 2,300 $ 1,977
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Equity in undistributed income of subsidiaries (2,827) (478) (643)
Accretion on U.S. Treasury Bills - - (10)
Other, net 168 (49) 88
-------------- ------------- -------------
Net cash provided by (used in) operating activities (82) 1,773 1,412
-------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital infusion to subsidiary - - (500)
Purchases of U.S. Treasury Bills - - (738)
Maturities of U.S. Treasury Bills - - 748
-------------- ------------- -------------
Net cash provided by (used in) investing activities - - (490)
-------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (446) (438) (441)
Treasury stock purchased (1,082) (458) -
-------------- ------------- -------------
Net cash used in financing activities (1,528) (896) (441)
-------------- ------------- -------------
Net increase (decrease) in cash (1,610) 877 481
Cash at beginning of year 1,739 862 381
-------------- ------------- -------------
Cash at end of year $ 129 $ 1,739 $ 862
============== ============= =============
</TABLE>
40
<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
Senior Vice President & Chief Financial Officer
41
<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, 1999 and 1998 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, 1999. 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, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen LLP
McGladrey & Pullen LLP
Schaumburg, Illinois
March 10, 2000
42
<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 2000 Annual Meeting of Shareholders of
the Company to be held on April 18, 2000, 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 2000 Annual Meeting of Shareholders of the Company to be held
on April 18, 2000, 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 2000 Annual
Meeting of Shareholders of the Company to be held on April 18, 2000, 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 2000 Annual Meeting of Shareholders of
the Company to be held on April 18, 2000, which is incorporated herein by
reference. Further information with respect to loans to the Directors and
Executive Officers of the Company is prov7ided in Note 10 in the Notes to
Consolidated Financial Statements included under Item 8 of this Form 10-K.
43
<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, 1999 and 1998
Consolidated Statements of Income - Years ended December 31, 1999, 1998
and 1997
Consolidated Statements of Cash Flows - Years ended December 31, 1999,
1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity - Years
ended December 31, 1999, 1998 and 1997
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 and by-laws (filed as an Exhibit
to the Registrant's 1998 Form 10K and incorporated herein by
reference).
(10.1) Employment Agreement between Upbancorp, Inc. and Richard K. Ostrom is
attached hereto as Exhibit A.
Employment Agreement between Heritage Bank, Upbancorp, Inc. and
John E. Fahrendorf, Jr. (filed as an Exhibit to the Registrant's 1998
Form 10-K and incorporated herein by reference).
Employment Agreement between Uptown National Bank of Chicago,
Upbancorp, Inc. and Robert P. Griffiths (filed as an Exhibit to the
Registrant's 1998 Form 10-K and incorporated herein by reference).
(10.2) Indemnity Agreement between Upbancorp, Inc. and its Directors and
Officers (filed as an Exhibit to the Registrant's 1992 Form 10-K and
incorporated herein by reference).
(22) Subsidiaries of the Registrant (see Item 1 which contains this
information).
(28) Proxy Statement for the 2000 Annual Meeting is attached hereto as
Exhibit B.
(b) REPORTS ON FORM 8-K - No reports on Form 8-K were filed during the
fourth quarter of 1999.
44
<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 10, 2000 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 10, 2000.
<TABLE>
<S> <C> <C>
/s/ Richard K. Ostrom Chairman of the Board March 10, 2000
- ------------------------------------------------------
Richard K. Ostrom
/s/ Stephen W. Edwards, CLU Director March 10, 2000
- ------------------------------------------------------
Stephen W. Edwards, CLU
/s/ Delbert R. Ellis Director March 10, 2000
- ------------------------------------------------------
Delbert R. Ellis
/s/ John E. Fahrendorf, Jr. Director March 10, 2000
- ------------------------------------------------------
John E. Fahrendorf, Jr.
/s/ Robert P. Griffiths Director March 10, 2000
- ------------------------------------------------------
Robert P. Griffiths
/s/ Alfred E. Hackbarth, Jr. Director March 10, 2000
- ------------------------------------------------------
Alfred E. Hackbarth, Jr.
/s/ James E. Heraty Director March 10, 2000
- ------------------------------------------------------
James E. Heraty
/s/ Marvin L. Kocian Director March 10, 2000
- ------------------------------------------------------
Marvin L. Kocian
</TABLE>
45
<PAGE>
Exhibit 10.1
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into as of July 1, 1999 (the
"Effective Date"), by and between Upbancorp, Inc. (hereinafter called
"Employer"), and the undersigned executive, Richard K. Ostrom (hereinafter
called "Executive").
WITNESSETH THAT:
WHEREAS, Employer desires to continue to employ Executive as its
Chairman, President and Chief Executive Officer and Executive desires to
continue in such employment;
NOW, THEREFORE, Employer and Executive, each intending to be legally
bound, hereby mutually covenant and agree as follows:
1. EMPLOYMENT AND TERM.
(a) EMPLOYMENT. Employer shall employ Executive as the
Chairman, President and Chief Executive Officer of Employer, and
Executive shall so serve, for the term set forth in Paragraph 1(b).
(b) TERM. The initial term of Executive's employment under
this Agreement shall commence on July 1, 1999 and end on June 30, 2004,
subject to the extension of such term as hereinafter provided and
subject to earlier termination as provided in Paragraph 6. The term of
this Agreement shall be extended automatically for one (1) additional
year after the initial term expires, and each anniversary date thereof
unless, no later than one hundred twenty (120) days prior to any such
renewal date, either the Board of Directors of Employer (the "Board"),
on behalf of Employer, or Executive gives written notice to the other,
in accordance with Paragraph 14, that the term of this Agreement shall
not be so extended. Notwithstanding anything in this Agreement to the
contrary, if at any time during Executive's period of employment under
this Agreement there is a Change in Control (as defined in
Paragraph 6), the term of this Agreement shall automatically be
extended to a date which is three years from the date of the Change in
Control or June 30, 2005, whichever is later (and shall be further
extended pursuant to the foregoing provisions of this Paragraph 1(b),
unless written notice to the contrary is given in accordance with this
Paragraph 1(b)).
2. DUTIES AND RESPONSIBILITIES.
(a) The duties and responsibilities of Executive are and shall
continue to be of an executive nature as shall be required by Employer
in the conduct of its business. Executive's powers and authority shall
be as prescribed by the by-laws of Employer and shall include all those
presently delegated to him, together with the performance of such other
duties and responsibilities as from time to time may be assigned to him
by the Board consistent with the position(s) of Chairman, President and
Chief Executive Officer. Executive recognizes, that during the period
of his employment hereunder, he owes an undivided duty of loyalty to
Employer, and agrees to devote
<PAGE>
his entire business time and attention to the performance of said
duties and responsibilities and to use his best efforts to promote and
develop the business of Employer. Executive will not perform any duties
for any other business without the prior written consent of Employer,
and may engage in charitable, civic or community activities, provided
that such duties or activities do not materially interfere with the
proper performance of his duties under this Agreement. During the
period of employment, Executive agrees to serve as a director on the
Board and/or any of its affiliates, as well as to serve as a member of
any committee of any said Board, to which he may be elected or
appointed.
(b) Notwithstanding that this Agreement provides for the
employment of Executive in his present capacity as Employer's Chairman,
President and Chief Executive Officer, nothing herein contained shall
assure Executive, nor in any manner be construed to constitute an
agreement by Employer to continue the employment of Executive after the
expiration of this Agreement in such capacity or in any other capacity.
3. SALARY.
(a) BASE SALARY. For services performed by Executive for
Employer pursuant to this Agreement during the period of employment as
provided in Paragraph 1(b) hereof, Employer shall pay Executive a base
salary at the rate of Two Hundred Fifty Thousand Dollars ($250,000) per
year, payable in substantially equal installments in accordance with
Employer's regular payroll practices. Executive's base salary (with any
increases under paragraph (b), below) shall not be subject to reduction
without Executive' s written consent. Any compensation which may be
paid to Executive under any additional compensation or incentive plan
of Employer or which may be otherwise authorized from time to time by
the Board (or an appropriate committee thereof) shall be in addition to
the base salary to which Executive shall be entitled under this
Agreement.
(b) INCREASE IN BASE SALARY. Executive's base salary shall be
subject to review from time to time and Employer may (but is not
required to) increase the base salary as the Board, in its discretion,
may determine.
4. BONUSES AND INCENTIVE COMPENSATION. For each fiscal year
during the term of employment, Executive shall be eligible to receive
compensation pursuant to the bonus and incentive compensation plans
established or to be established by Employer and administered by the
Board, in accordance with the terms of any such plan as adopted and
administered by the Board for senior executives of Employer, which plan
may be amended from time to time by the Board in its discretion.
Nothing contained herein shall be construed as requiring the Board to
adopt any bonus or incentive compensation plan.
5. OTHER BENEFITS. In addition to the compensation described
in Paragraphs 3 and 4, above, Executive shall also be entitled to the
following:
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<PAGE>
(a) PARTICIPATION IN BENEFIT PLANS. Executive shall be
entitled to participate in all of the various retirement, welfare, life
insurance, accident and disability insurance, medical and dental plans,
fringe benefit, and expense reimbursement plans, programs and
arrangements of Employer to the extent Executive is eligible for
participation under the terms of such plans, programs and arrangements,
including, but not limited to non-qualified retirement programs,
deferred compensation plans, supplemental compensation plans, profit
sharing (401(k), ESOP, etc.), long term disability and any other
incentive or benefit plan.
(b) VACATION. Executive shall be entitled to such number of
days of vacation with pay during each calendar year during the period
of employment in accordance with Employer's applicable personnel policy
as in effect from time to time.
(c) EXECUTIVE PERQUISITES. Employer shall furnish Executive
with such perquisites which may from time to time be provided by
Employer which are suitable to Executive's position and adequate for
the performance of his duties hereunder and reasonable in the
circumstances.
(d) EXPENSE REIMBURSEMENT. Employer shall reimburse
Executive's reasonable expenses incurred in performing services
hereunder, which are incurred and accounted for in accordance with
Employer's policies and procedures applicable thereto.
(e) AUTOMOBILE. Executive shall be provided with a luxury
class automobile of his choice. This automobile will be provided by
Employer. Executive shall pay an agreed upon rate for personal usage of
the vehicle. All expense shall be borne by Employer. At any time after
three years after any vehicle acquired after the date of this Agreement
has been placed in service, Employer shall, at Executive's option,
provide Executive with a replacement luxury class vehicle of his choice
and allow Executive to acquire the original vehicle for its book value
as shown on the records of Employer. Upon Executive's retirement or
termination under the provisions of Paragraph 6 below, he shall be
permitted to acquire his then provided vehicle upon the same terms as
above.
(f) ADDITIONAL LIFE INSURANCE. Employer shall provide the
Employee additional life insurance in the amount of five hundred
thousand dollars ($500,000) under a split dollar arrangement whereby
Employer is assigned the cash value of the policy to the extent of the
premiums paid by Employer and the Employee owns all other rights in
the policy. Executive's obligation under the arrangement shall be to
pay the annual cost of the policy as if the policy were a term policy,
and Employer shall pay the balance of premiums. Executive 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. Employer shall continue this insurance coverage in the case of
the termination of this Agreement due to the Executive's disability (as
hereinafter defined) under the terms and conditions described herein.
Upon Executive's retirement or termination (other than due to his
disability) under the provisions of Paragraph 6, Employer shall assign
all of its interest in the policy to Executive upon payment to Employer
of the amount Employer has contributed to the payment of the premiums.
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<PAGE>
(g) CLUBS. Executive 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
Executive's and they shall be primarily chosen for business purposes.
The cost of said clubs shall be borne by Employer and Executive shall
reimburse Employer for any strictly personal charges incurred. Upon
Executive's termination of employment hereunder, he shall be allowed
to continue membership in said clubs at his expense. Executive shall
not be required to reimburse Employer or Employer for any dues,
assessments or initial membership fees.
(h) FINANCIAL PLANNING. Employer shall reimburse Executive for
expenses incurred by Executive in securing personal financial planning
services. Such reimbursement shall not exceed $15,000 over the term of
this Agreement.
6. TERMINATION. Unless earlier terminated in accordance with
the following provisions of this Paragraph 6, Employer shall continue
to employ Executive and Executive shall remain employed by Employer
during the entire term of this Agreement as set forth in Paragraph
l(b). Paragraph 7 hereof sets forth certain obligations of Employer in
the event that Executive's employment hereunder is terminated. Certain
capitalized terms used in this Paragraph 6 and in Paragraph 7 hereof
are defined in Paragraph 6(d), below.
(a) DEATH OR DISABILITY. Except to the extent otherwise
provided in Paragraph 7 with respect to certain post-Date of
Termination payment obligations of Employer and as provided in the last
sentence of Paragraph 6(d)(v), this Agreement shall terminate
immediately as of the Date of Termination in the event of Executive's
death or in the event that Executive becomes disabled. Executive will
be deemed to be disabled upon the earlier of (i) the end of a six
(6)-consecutive month period, or of an aggregate period of nine (9)
months out of any consecutive twelve (12) months, during which, by
reason of physical or mental injury or disease, Executive has been
unable to perform substantially all of his usual and customary duties
under this Agreement or (ii) the date that a reputable physician
selected by the Board, and as to whom Executive has no reasonable
objection, determines in writing that Executive will, by reason of
physical or mental injury or disease, be unable to perform
substantially all of Executive's usual and customary duties under this
Agreement for a period of at least six (6) consecutive months. If any
question arises as to whether Executive is disabled, upon reasonable
request therefor by the Board, Executive shall submit to reasonable
medical examination for the purpose of determining the existence,
nature and extent of any such disability. The Board shall promptly give
Executive written notice of any such determination of Executive's
disability and of any decision of the Board to terminate Executive' s
employment by reason thereof. In the event of disability, until the
Date of Termination, the base salary payable to Executive under
Paragraph 3 hereof shall be reduced dollar-for-dollar by the amount of
disability benefits, if any, paid to Executive in accordance with any
disability policy or program of Employer.
4
<PAGE>
(b) DISCHARGE FOR CAUSE. In accordance with the procedures
hereinafter set forth, the Board may discharge Executive from his
employment hereunder for Cause (as hereinafter defined). Except to the
extent otherwise provided in Paragraph 7 with respect to certain
post-Date of Termination obligations of Employer, this Agreement shall
terminate immediately as of the Date of Termination in the event
Executive is discharged for Cause. Any discharge of Executive for Cause
shall be communicated by a Notice of Termination (as hereinafter
defined) to Executive given in accordance with Paragraph 14 of this
Agreement.
(c) TERMINATION FOR OTHER REASONS. Employer may discharge
Executive without Cause by giving written notice to Executive in
accordance with Paragraph 14. Executive may resign from his employment
with or without Good Reason (as hereinafter defined), without liability
to Employer, by giving written notice to Employer in accordance with
Paragraph 14 at least sixty (60) days prior to the Date of Termination;
provided, however, that no resignation shall be treated as a
resignation for Good Reason unless the written notice thereof is given
within one hundred twenty (120) days after the occurrence which
constitutes "Good Reason" or during the period described in the final
sentence of Paragraph 6(d)(v). Except to the extent otherwise provided
in Paragraph 7 with respect to certain post-Date of Termination
obligations of Employer, this Agreement shall terminate immediately as
of the Date of Termination in the event Executive is discharged without
Cause or resigns.
(d) DEFINITIONS. For purposes of this Agreement, the following
capitalized terms shall have the meanings set forth below:
(i) "ACCRUED OBLIGATIONS" shall mean, as of the Date of
Termination, the sum of (A) Executive's base salary under Paragraph 3
through the Date of Termination to the extent not theretofore paid, (B)
the amount of any deferred compensation and other cash compensation
accrued by Executive as of the Date of Termination to the extent not
theretofore paid, (C) any vacation pay, expense reimbursements and
other cash entitlements accrued by Executive as of the Date of
Termination to the extent not theretofore paid, (D) any grants and
awards vested or accrued under any equity-based incentive compensation
plan or program and (E) all other benefits which have accrued as of the
Date of Termination. For the purpose of this Paragraph 6(d)(i), except
as provided in the applicable plan, program or policy, amounts shall be
deemed to accrue ratably over the period during which they are earned,
but no discretionary compensation shall be deemed earned or accrued
until it is specifically approved by the Board in accordance with the
applicable plan, program or policy.
(ii) "CAUSE" shall mean (A) Executive's willful and continued
(for a period of not less than thirty (30) days after written notice
thereof) failure to perform substantially the duties of his employment
(other than as a result of physical or mental incapacity, or while on
vacation); or (B) Executive's willful engaging in illegal conduct or
gross misconduct which is materially and demonstrably injurious to
Employer; or (C) Executive's conviction of a felony involving moral
turpitude, but specifically excluding any conviction based entirely on
vicarious liability (with "vicarious liability" meaning liability based
on acts of Employer for which Executive
5
<PAGE>
is charged solely as a result of his offices with Employer and in which he was
not directly involved and did not have prior knowledge of such actions or
intended actions); provided, however, that no act or failure to act, on the part
of Executive, shall be considered "willful" unless it is done, or omitted to be
done, by Executive in bad faith or without reasonable belief that Executive's
action or omission was in the best interests of Employer; and provided further
that no act or omission by Executive shall constitute Cause hereunder unless
Employer has given detailed written notice thereof to Executive, and Executive
has failed to remedy such act or omission. Following a Change in Control (as
hereinafter defined), the Board may discharge Executive for Cause only for acts
or omissions of the Executive that occur after the occurrence of a Change in
Control.
(iii) "CHANGE IN CONTROL" shall mean the occurrence of any one of the
following events:
(a) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended), other than
(i) a trustee or other fiduciary holding securities under an employee
benefit plan of Employer or any of its subsidiaries, or (ii) a
corporation owned directly or indirectly by the stockholders of
Employer in substantially the same proportions as their ownership of
stock of Employer, is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under said Act), directly or indirectly, of securities of
Employer representing 20% or more of the total voting power of the then
outstanding shares of capital stock of Employer entitled to vote
generally in the election of directors (the"Voting Stock"), provided,
however, that the following shall not constitute a change in control:
(1) such person becomes a beneficial owner of 20% or more of the Voting
Stock as the result of an acquisition of such Voting Stock directly
from Employer, or (2) such person becomes a beneficial owner of 20% or
more of the Voting Stock as a result of the decrease in the number of
outstanding shares of Voting Stock caused by the repurchase of shares
by Employer; provided, further, that in the event a person described in
clause (1) or (2) shall thereafter increase (other than in
circumstances described in clause (1) or (2)) beneficial ownership of
stock representing more than 1% of the Voting Stock, such person shall
be deemed to become a beneficial owner of 20% or more of the Voting
Stock for purposes of this paragraph (A), provided such person
continues to beneficially own 10% or more of the Voting Stock after
such subsequent increase in beneficial ownership, or
(b) During any period of two consecutive years, individuals
(the "Incumbent Board"), who at the beginning of such period constitute
the board of directors of Employer, and any new director, whose
election by the board of directors of Employer or nomination for
election by Employer's stockholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were
directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any
reason to constitute a majority thereof, or
6
<PAGE>
(c) Consummation of a reorganization, merger or consolidation
or the sale or other disposition of' all or substantially all of the
assets of Employer (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 Voting Stock immediately prior
to such Business Combination beneficially own, directly or indirectly,
more than 70% 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 Employer or all or substantially all of Employer'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 Voting Stock of Employer, 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 the
Incumbent Board at the time of the execution of the initial agreement,
or action of the Incumbent Board, providing for such Business
Combination; or
(d) the stockholders of Employer approve a plan of complete
liquidation or dissolution of Employer.
The board of directors of Employer has final authority to construe and interpret
the provisions of the foregoing paragraphs (A), (B), (C) and (D) and to
determine the exact date on which a Change in Control has been deemed to have
occurred thereunder.
(iv) "DATE OF TERMINATION" shall mean (A) in the event of a discharge
of Executive for or without Cause, the date Executive receives a Notice of
Termination, or any later date specified in such Notice of Termination, as the
case may be, (B) in the event of a resignation by Executive, the date specified
in the written notice to Employer, which date shall be no less than sixty (60)
days from the date of such written notice, (C) in the event of Executive's
death, the date of Executive's death, and (D) in the event of termination of
Executive's employment by reason of disability pursuant to Paragraph 7(a), the
date Executive receives written notice of such termination.
(v) "GOOD REASON" shall mean the occurrence, other than in connection
with a discharge for Cause, of any of the following without Executive's consent:
(A) Executive is not reelected or is removed from the positions with Employer
set forth in Paragraph 1(a), other than as a result of Executive's election or
appointment to positions of equal or superior scope and responsibility; or (B)
Executive shall fail to be vested by Employer with the power and authority of
any of said positions, excluding for this purpose any isolated action not taken
in bad faith and which is remedied by Employer promptly after receipt of written
notice thereof given by Executive in accordance with Paragraph 14; or (C) any
failure by Employer to comply with any of the provisions of this Agreement,
including a reduction in Executive's base salary or Employer's discontinuation
of the benefits described in Paragraph 5 unless said benefit program is
discontinued for all executive officers of Employer and Employer, other than any
isolated, insubstantial and inadvertent failure not occurring in bad faith and
which is remedied by Employer promptly after receipt of written notice thereof
given by Executive in accordance with Paragraph 14; or (D) Employer giving
notice to
7
<PAGE>
Executive pursuant to Paragraph 1(b) that the term of this Agreement shall not
be extended upon the expiration of the then-current term; or (E) Employer
requiring Executive to be based at an office or location which is more than ten
(10) miles from Executive's office as of the Effective Date; or (F) Executive is
not re-elected to serve as a director of Employer or Employer. In addition, any
termination of this Agreement by Executive for any reason, including his death
or disability, during the one (1) year period beginning on the date of the
occurrence of a Change in Control shall be deemed to be for "Good Reason."
(vi) "NOTICE OF TERMINATION" shall mean a written notice which (A)
indicates the specific termination provision in this Agreement relied upon (B)
sets forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of Executive's employment under the provision so indicated
and (C) if the Date of Termination is to be other than the date of receipt of
such notice, specifies the Date of Termination.
7. OBLIGATIONS OF EMPLOYER UPON TERMINATION. The following provisions
describe the obligations of Employer to Executive under this Agreement upon
termination of employment. However, except as explicitly provided in this
Agreement, nothing in this Agreement shall limit or otherwise adversely affect
any rights which Executive may have under applicable law, under any other
agreement with Employer or any of its affiliates or subsidiaries, or under any
compensation or benefit plan, program, policy or practice of Employer or any of
its affiliates or subsidiaries.
(a) DEATH, DISABILITY, DISCHARGE FOR CAUSE, OR RESIGNATION WITHOUT GOOD
REASON. In the event this Agreement terminates pursuant to Paragraph 6(a) by
reason of the death or disability of Executive, or pursuant to Paragraph 6(b) by
reason of the discharge of Executive by Employer for Cause, or pursuant to
Paragraph 6(c) by reason of the resignation of Executive other than for Good
Reason, Employer shall pay to Executive, or his heirs or estate, in the event of
Executive's death, all Accrued Obligations in a lump sum in cash within thirty
(30) days after the Date of Termination and, in the event this Agreement
terminates due to Executive's disability, Employer shall also comply with the
provisions of Paragraphs 5(e), 5(f) and 5(g), above; provided, however, that any
portion of the Accrued Obligations which consists of bonus, deferred
compensation, incentive compensation, insurance benefits or other employee
benefits shall be determined and paid in accordance with the terms of the
relevant plan or policy as applicable to Executive; provided further, that in
the event of Executive's death or disability during the one (1) year period
following the occurrence of a Change in Control, Executive shall be deemed to
have terminated this Agreement for Good Reason and Executive (or his heirs or
estate) shall receive the payments described in Paragraph 7(c), below.
(b) DISCHARGE WITHOUT CAUSE OR RESIGNATION WITH GOOD REASON. In the
event that prior to the occurrence of a Change in Control, this Agreement
terminates pursuant to Paragraph 6(c) by reason of: (1) the discharge of
Executive by Employer for any reason (other than for Cause); or (2) by reason of
the resignation of Executive for Good Reason:
8
<PAGE>
(i) Employer shall pay all Accrued Obligations to Executive in a lump
sum in cash within thirty (30) days after the Date of Termination; provided,
however, that any portion of the Accrued Obligations which consists of bonus,
deferred compensation, incentive compensation, insurance benefits or other
employee benefits shall be determined and paid in accordance with the terms of
the relevant plan or policy as applicable to Executive;
(ii) Within thirty (30) days after the Date of Termination, Employer
shall pay to Executive a bonus for the year during which termination occurs,
calculated as a prorata portion of his then current target annual bonus amount
based on the number of days elapsed during the year through the Date of
Termination;
(iii) Employer shall continue to pay to Executive for the remainder of
the Term of this Agreement (up to thirty-six (36) months) or for a period of
twelve (12) months, whichever is longer (the "Severance Period"), an annual
salary equal to the greater of Executive's base salary as of the Date of
Termination or Executive's base salary during the calendar year immediately
preceding the year in which the Date of Termination occurs, payable in
substantially equal installments in accordance with Employer's regular payroll
practices;
(iv) During the Severance Period, Employer shall provide complete
medical, dental, life insurance, and accident and disability insurance coverage
for Executive at no cost to Executive, said coverage to be the same or
equivalent to the coverage provided other Employer executive employees; and
(v) Employer shall pay for outplacement counseling, the scope and
provider of which shall be selected by Executive, for a period beginning on the
Date of Termination and ending on the date Executive is first employed elsewhere
or otherwise is provided compensated services of any type (including
self-employment), provided that in no event shall such outplacement services be
provided for a period greater than two (2) years, and the cost of such services
exceed $15,000.
In the event that upon the expiration of the Severance Period, Executive is not
employed or otherwise providing compensated services of any type (including
self-employment), and has not done so during the final ninety (90) days of the
Severance Period, Employer may, in its sole discretion, agree to extend the
Severance Period for up to an additional twelve (12) months (the "Extended
Severance Period"). The payments to Executive described in clause (III), above,
and the coverages described in clause (IV), above, shall continue during the
Extended Severance Period, subject to earlier termination effective as of the
first day of the month following the date the on which Executive becomes
employed or provides compensated services of any type (including
self-employment).
Executive shall provide such information as Employer may reasonably request to
determine Executive's continued eligibility for the payments and benefits
provided by this Paragraph 7(b).
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<PAGE>
(c) EFFECT OF CHANGE IN CONTROL. In the event that a Change in Control
occurs and this Agreement thereafter terminates pursuant to Paragraph 6(c) by
reason of: (1) the discharge of Executive by Employer for any reason (other than
for Cause); or (2) the resignation of Executive for Good Reason:
(i) Employer shall pay all Accrued Obligations to Executive in
a lump sum in cash within thirty (30) days after the Date of
Termination; provided, however, that any portion of the Accrued
Obligations which consists of bonus, deferred compensation, incentive
compensation, insurance benefits or other employee benefits shall be
determined and paid in accordance with the terms of the relevant plan
or policy as applicable to Executive;
(ii) Employer shall continue to pay to Executive during the
four year period after the Date of Termination (the "Change of Control
Payment Period") an annual salary equal to the greater of Executive's
base salary as of the Date of Termination or Executive's base salary
during the calendar year immediately preceding the year in which the
Change in Control occurred, payable in substantially equal installments
in accordance with Employer's regular payroll practices;
(iii) For each fiscal year during the Change in Control
Payment Period, Employer shall pay to Executive within thirty (30) days
of the end of each such fiscal year:
(A) the greater of (Y) Executive's target bonus under
Employer's annual bonus plan for the calendar year in which
the Date of Termination occurs, or (Z) the average of the sum
of the amounts earned by Executive under the annual bonus plan
with respect to the three (3) calendar years immediately
preceding the calendar year in which Executive's Date of
Termination occurs, or if such sum would be greater, with
respect to the three (3) calendar years immediately preceding
the calendar year of the date of the Change in Control; plus
(B) (except to the extent coverage is provided
pursuant to clause (iv), below) the sum of:
(I) the annual value of the contributions that
would have been expected to be made or credited by Employer
to, and benefits expected to be accrued under, the qualified
and non-qualified employee profit sharing, 40l(k), pension
and any other benefit plans maintained by Employer to or for
the benefit of Executive; plus
(II) the annual value of the Other Benefits
described in Paragraph 5(a), (c) above and (g).
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<PAGE>
(iv) During the Change in Control Period, Employer
shall provide complete medical, dental, life insurance and
accident and disability insurance coverage for Executive at no
cost to Executive, said coverage to be the same or equivalent
to the coverage provided other Employer executive employees.
For purposes of paragraph (B)(I) above, the annual value of the contributions
and accruals to or under the employee benefit plans shall be determined on the
basis of the actual rate of contributions or accruals, as applicable, and the
provisions of the plans as in effect during the calendar year immediately
preceding the date of the Change in Control, or if the value so determined would
be greater, during the calendar year immediately preceding the Date of
Termination. The "annual value" of Executive perquisites described in Paragraph
5(c) for purposes of paragraph (B)(II), above, shall be 7.5% of the annual base
salary amount applicable under clause (ii), above.
At Executive's option, and provided Executive gives written notice to Employer
within one hundred twenty (120) days of the Date of Termination, Employer shall
make to Executive within thirty (30) days of Employer's receipt of such notice,
a lump sum payment equal the amounts to be paid to Executive pursuant to clauses
(ii) and (iii), above (less any sums previously paid to Executive pursuant to
such clauses), and shall comply with clause (iv), above, for the remainder of
the Change in Control Payment Period.
Executive shall also be entitled to out-placement counseling from a firm
selected by Executive for a period beginning on the Date of Termination and
ending on the date Executive is first employed or otherwise providing
compensated services of any type (including, but not limited to,
self-employment), provided, that in no event shall Executive be entitled to
out-placement counseling after the date which is two (2) years from the Date of
Termination, and the cost of such services shall not exceed $15,000.
Notwithstanding the foregoing, if this Agreement is terminated pursuant to
Paragraph 6(c) by reason of: (a) the discharge of Executive by Employer for any
reason (other than for Cause); or (b) the resignation of Executive for Good
Reason, and if a Change in Control thereafter occurs, then Executive shall be
deemed for purposes of this Paragraph 7(c) to have been terminated pursuant to
Paragraph 7(c) immediately following the date the Change in Control occurs and
to be entitled to receive the payments described in Paragraph 7(c) if it is
reasonably demonstrated by Executive that such earlier termination was (i) at
the request of a third party who had taken steps reasonably calculated to effect
the Change in Control, or (ii) otherwise arose, or the circumstances that
precipitated the termination otherwise arose, in connection with or in
anticipation of the Change in Control. Payments received by Executive pursuant
to Paragraph 7(b) prior to the time it is determined that Executive is eligible
to receive payments pursuant to Paragraph 7(c) shall be deemed to be additional
payments and shall not be deducted from the amounts Executive is to receive
pursuant to Paragraph 7(c).
(d) EFFECT ON OTHER AMOUNTS. The payments provided for in this
Paragraph 7 shall be in addition to all other sums then payable and owing to
Executive shall be subject to
11
<PAGE>
applicable federal and state income and other withholding taxes and shall be in
full settlement and satisfaction of all of Executive's claims and demands. Upon
such termination of this Agreement, Employer shall have no rights or obligations
under this Agreement, other than its obligations under this Paragraph 7, and
Executive shall have no rights or obligations under this Agreement, other than
Executive's obligations under Paragraphs 11 and 12 hereof (to the extent
applicable) and his rights under Paragraph 7 (to the extent applicable).
(e) CONDITIONS. Any payments of benefits made or provided pursuant to
this Paragraph 7 are subject to Executive's:
(i) compliance with the provisions of Paragraphs 11 and 12
hereof (to the extent applicable); and
(ii) delivery to Employer of a resignation from all offices,
directorships and fiduciary positions with Employer, its affiliates
and employee benefit plans.
(f) RETIREMENT. In the event this Agreement has not been terminated
as provided in Paragraph 6, upon Executive's retirement as an employee of
Employer, Employer shall provide complete medical and dental insurance
coverage for Executive for so long as he shall live at no cost to Executive,
said coverage to be the same or equivalent to the coverage provided other
Employer executive employees. Coverage shall be reduced by any coverage
Executive then has under any public medical plan such as Medicare. Medical
and dental coverage as provided herein shall include Executive's spouse for
so long as she shall live, provided she does not have coverage available to
her from any other source including Medicare.
8. CERTAIN ADDITIONAL PAYMENTS BY EMPLOYER.
(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by Employer to or
for the benefit of Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this
Paragraph 8) (a "Payment") would be subject to the excise tax imposed by Section
4999 of the Internal Revenue Code of 1986, as amended, (the "Code"), or if any
interest or penalties are incurred by Executive with respect to such excise tax
(such excise tax, together with any such interest and penalties, being
hereinafter collectively referred to as the "Excise Tax"), then Executive shall
be entitled to receive an additional payment (a "Gross-Up Payment") in an amount
such that, after payment by Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including, without limitation,
any income taxes (and any interest and penalties imposed with respect thereto)
and Excise Tax imposed upon the Gross-Up Payment, Executive retains an amount of
the Gross-Up Payment equal to the Excise Tax imposed upon the Payment.
(b) Subject to the provisions of paragraph (c), below, all
determinations required to be made under this Paragraph 8, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such
12
<PAGE>
determination, shall be made by the independent public accountants then
regularly retained by Employer (the "Accounting Firm") in consultation with
counsel acceptable to Executive, which shall provide detailed supporting
calculations both to Employer and Executive within fifteen (15) business days of
the receipt of notice from Executive that there has been a Payment, or such
earlier time as is requested by Employer. In the event that the Accounting Firm
is serving as accountant or auditor for the individual, entity or group
effecting a Change in Control, Executive shall appoint another nationally
recognized accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder) in
consultation with counsel acceptable to Executive. All fees and expenses of the
Accounting Firm and such counsel shall be borne solely by Employer. Any Gross-Up
Payment, as determined pursuant to this Paragraph 8, shall be paid by Employer
to Executive within five (5) days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is payable
by Executive, it shall furnish Executive with a written opinion that failure to
report the Excise Tax on Executive's applicable federal income tax return would
not result in the imposition of a negligence or similar penalty. Any good faith
determination by the Accounting Firm shall be binding upon Employer and
Executive. As a result of the uncertainty in the application of Section 4999 of
the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments which will not have been made
by Employer should have been made ("Underpayment"), consistent with the
calculations required to be made hereunder. In the event that Employer exhausts
its remedies pursuant to paragraph (c), below, and Executive thereafter is
required to make a payment of any Excise Tax, the Accounting Firm shall
determine the amount of the Underpayment that has occurred (including any
interest and penalties) and any such Underpayment shall be promptly paid by
Employer to or for the benefit of Executive.
(c) Executive shall notify Employer in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by
Employer of a Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than fifteen (15) business days after Executive is
informed in writing of such claim and shall apprise Employer of the nature of
such claim and the date on which such claim is requested to be paid. Executive
shall not pay such claim prior to the expiration of the thirty (30)-day period
following the date on which Executive gives such notice to Employer (or such
shorter period ending on the date that any payment of taxes with respect to such
claim is due). If Employer notifies Executive in writing prior to the expiration
of such period that it desires to contest such claim, Executive shall:
(i) Give Employer any information reasonably requested by Employer
relating to such claim,
(ii) Take such action in connection with contesting such claim as
Employer shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by Employer,
13
<PAGE>
(iii) Cooperate with Employer in good faith in order effectively to
contest such claim, and
(iv) Permit Employer to participate in any proceedings relating to such
claim;
provided, however, that Employer shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limiting the foregoing provisions of this
paragraph (c), Employer shall control all proceedings taken in connection with
such contest and, at its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
Executive to pay the tax claimed and sue for a refund or contest the claim in
any permissible manner; and Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as Employer shall determine;
provided, however, that if Employer directs Executive to pay such claim and sue
for a refund, Employer shall advance the amount of such payment to Executive on
an interest-free basis and shall indemnify and hold Executive harmless, on an
after-tax basis, from any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and further provided
that any extension of the statute of limitations relating to payment of taxes
for the taxable year of Executive with respect to which such contested amount is
claimed to be due is limited solely to such contested amount. Furthermore,
Employer's control of the contest shall be limited to issues with respect to
which a Gross-Up Payment would be payable hereunder and Executive shall be
entitled to settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by Executive of an amount advanced by
Employer pursuant to paragraph (c), above, Executive becomes entitled to receive
any refund with respect to such claim, Executive shall (subject to Employer's
complying with the requirements of said paragraph (c)) promptly pay to Employer
the amount of such refund (together with any interest paid or credited thereon,
after taxes applicable thereto). If, after the receipt by Executive of an amount
advanced by Employer pursuant to said paragraph (c), a determination is made
that Executive shall not be entitled to any refund with respect to such claim
and Employer does not notify Executive in writing of its intent to contest such
denial of refund prior to the expiration of thirty (30) days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid; and the amount of such advance shall offset, to the extent thereof,
the amount of the Gross-Up Payment required to be paid.
9. DISPUTE RESOLUTION. In the event any dispute arises and the parties
after good faith efforts are unable to agree as to the calculation of the
amounts payable under this Agreement, it shall be settled in accordance with the
majority opinion of a committee consisting of an accountant chosen
14
<PAGE>
by Employer, an accountant chosen by Executive and an independent accountant
acceptable to both Executive and Employer, as the case may be. The committee's
determination shall be binding and conclusive on the parties hereto. Employer
shall pay all fees and expenses of the dispute resolution.
10. ENFORCEMENT. In the event Employer shall fail to pay any amounts due
to Executive under this Agreement as they come due, Employer agrees to pay
interest on such amounts at a rate equal to the prime rate (as from time to time
published in THE WALL STREET JOURNAL (Midwest Edition) plus four percent (4%)
per annum. Employer agrees that Executive and any successor shall be entitled to
recover all costs of enforcing any provision of this Agreement, including
reasonable attorneys' fees and costs of litigation.
11. CONFIDENTIAL INFORMATION. Executive shall not at any time during or
following his employment hereunder, directly or indirectly, disclose or use on
his behalf or another's behalf, publish or communicate, except in the course of
his employment and in the pursuit of the business of Employer or any of its
subsidiaries or affiliates, any proprietary information or data of Employer or
any of its subsidiaries or affiliates, which is not generally known in the
banking business and which Employer may reasonably regard as confidential and
proprietary. Executive recognizes and acknowledges that all knowledge and
information which he has or may acquire in the course of his employment, such
as, but not limited to the business, developments, procedures, techniques,
activities or services of Employer or the business affairs and activities of
any- customer, prospective customer, individual firm or entity doing business
with Employer are its sole valuable property, and shall be held by Executive in
confidence and in trust for their sole benefit. All records of every nature and
description which come into Executive's possession, whether prepared by him, or
otherwise, shall remain the sole property of Employer and upon termination of
his employment for any reason, said records shall be left with Employer as part
of its property.
12. NON-COMPETITION. Executive acknowledges that Employer and its
affiliates and subsidiaries by nature of their respective businesses have a
legitimate and protectable interest in their clients, customers and employees
with whom they have established significant relationships as a result of a
substantial investment of time and money, and but for his employment hereunder,
he would not have had contact with such clients, customers and employees.
Executive agrees that during the period of his employment with Employer and for
a period of one (1) year after termination of his employment for any reason
(other than termination of employment by resignation for Good Reason prior to a
Change in Control or for any reason upon or after a Change in Control) (the
"Non-Compete Period"), he will not (except in his capacity as an employee of
Employer) directly or indirectly, for his own account, or as an agent, employee,
director, owner, partner, or consultant of any corporation, firm, partnership,
joint venture, syndicate, sole proprietorship or other entity which has a place
of business (whether as a principal, division, subsidiary, affiliate, related
entity, or otherwise) located within the Market Area (as hereinafter defined):
(a) solicit or induce, or attempt to solicit or induce any
client or customer of Employer or any of its subsidiaries or affiliates
not to do business with Employer or any of its subsidiaries or
affiliates; or
15
<PAGE>
(b) solicit or induce, or attempt to solicit or induce, any
employee or agent of Employer or any of its subsidiaries or affiliates
to terminate his or her relationship with Employer or any of its
subsidiaries or affiliates.
For purposes of this Agreement, "Market Area" shall be an area encompassed
within ten (10) miles from the principal offices of Employer or any of its
subsidiaries, except for the central loop area of Chicago.
The foregoing provisions shall not be deemed to prohibit (i) Executive's
ownership, not to exceed ten percent (10%) of the outstanding shares, of capital
stock of any corporation whose securities are publicly traded on a national or
regional securities exchange or in the over-the-counter market or (ii) Executive
serving as a director of other corporations and entities to the extent these
directorships do not inhibit the performance of his duties hereunder or conflict
with the business of Employer.
13. REMEDIES. Executive acknowledges that the restraints and agreements
herein provided are fair and reasonable, that enforcement of the provisions of
Paragraphs 11 and 12 will not cause him/her undue hardship and that said
provisions are reasonably necessary and commensurate with the need to protect
Employer and its legitimate and proprietary business interests and property from
irreparable harm. Executive acknowledges and agrees that (a) a breach of any of
the covenants and provisions contained in Paragraphs 11 or 12 above, will result
in irreparable harm to the business of Employer, (b) a remedy at law in the form
of monetary damages for any breach by him of any of the covenants and provisions
contained in Paragraphs 11 and 12 is inadequate, (c) in addition to any remedy
at law or equity for such breach, Employer shall be entitled to institute and
maintain appropriate proceedings in equity, including a suit for injunction to
enforce the specific performance by Executive of the obligations hereunder and
to enjoin Executive from engaging in any activity in violation hereof and (d)
the covenants on his part contained in Paragraphs 11 and 12, shall be construed
as agreements independent of any other provisions in this Agreement, and the
existence of any claim, setoff or cause of action by Executive against Employer,
whether predicated on this Agreement or otherwise, shall not constitute a
defense or bar to the specific enforcement by Employer of said covenants. In the
event of a breach or a violation by Executive of any of the covenants and
provisions of this Agreement, the running of the Non-Compete Period (but not of
Executive's obligation thereunder), shall be tolled during the period of the
continuance of any actual breach or violation.
14. NOTICES. Any notice or other communication required or permitted to be
given hereunder shall be determined to have been duly given to any party (a)
upon delivery to the address of such party specified below if delivered
personally or by courier; (b) upon dispatch if transmitted by telecopy or other
means of facsimile, provided a copy thereof is also sent by regular mail or
courier, or (c) within forty-eight (48) hours after deposit thereof in the U.S.
mail, postage prepaid, for delivery as certified mail, return receipt requested,
addressed, in any case to the party at the following address(es) or telecopy
numbers:
(a) If to Executive, at the address set forth on the signature
page hereof.
16
<PAGE>
(b) If to Employer:
Upbancorp, Inc.
4753 North Broadway
Chicago, Illinois 60640
Attn: Board of Directors
Telecopy No.: (773) 989-5749
with a copy to:
Hinshaw & Culbertson
222 North LaSalle Street, Suite 300
Chicago, Illinois 60601
Attn: Timothy M. Sullivan
Telecopy No: (312) 704-3001
or to such other address(es) or telecopy number(s) as any party may designate by
Written Notice in the aforesaid manner.
15. FULL SETTLEMENT; NO MITIGATION. Employer's obligation to make the
payments and provide the benefits provided for in this Agreement and otherwise
to perform its obligations hereunder shall not be affected by any set-off,
counterclaim, recoupment, defense or other claim, right or action which Employer
may have against Executive or others. In no event shall Executive be obligated
to seek other employment or take any other action by way of mitigation of the
amounts payable to Executive under any of the provisions of this Agreement, and
such amounts shall not be reduced whether or not Executive obtains other
employment.
16. PAYMENT IN THE EVENT OF DEATH. In the event payment is due and owing
by Employer to Executive under this Agreement upon the death of Executive,
payment shall be made to such beneficiary as Executive may designate in writing,
or failing such designation, then the executor of his estate, in full settlement
and satisfaction of all claims and demands on behalf of Executive, shall be
entitled to receive all amounts owing to Executive at the time of death under
this Agreement. Such payments shall be in addition to any other death benefits
of Employer and in full settlement and satisfaction of all severance benefit
payments provided for in this Agreement.
17. ENTIRE UNDERSTANDING. This Agreement constitutes the entire
understanding between the parties relating to Executive's employment hereunder
and supersedes and cancels all prior written and oral understandings and
agreements with respect to such matters, except for the terms and provisions of
any employee benefit or other compensation plans (or any agreements or awards
thereunder), referred to in this Agreement, or as otherwise expressly
contemplated by this Agreement.
17
<PAGE>
18. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the heirs and representatives of Executive and the successors and
assigns of Employer. Employer shall require any successor (whether direct or
indirect, by purchase, merger, reorganization, consolidation, acquisition of
property or stock, liquidation, or otherwise) to all or a substantial portion of
its assets, by agreement in form and substance reasonably satisfactory to
Executive, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent that Employer would be required to perform this
Agreement if no such succession had taken place. Regardless of whether such an
agreement is executed, this Agreement shall be binding upon any successor of
Employer in accordance with the operation of law, and such successor shall be
deemed the "Employer" for purposes of this Agreement.
19. TAX WITHHOLDING. Employer shall provide for the withholding of any
taxes required to be withheld by federal, state, or local law with respect to
any payment in cash, shares of stock and/or other property made by or on behalf
of Employer to or for the benefit of Executive under this Agreement or
otherwise. Employer may, at its option: (a) withhold such taxes from any cash
payments owing from Employer to Executive, (b) require Executive to pay to
Employer in cash such amount as may be required to satisfy such withholding
obligations and/or (c) make other satisfactory arrangements with Executive to
satisfy such withholding obligations.
20. NO ASSIGNMENT. Except as otherwise expressly provided herein, this
Agreement is not assignable by any party and no payment to be made hereunder
shall be subject to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance or other charge. In certain situations, Employer may
direct its wholly-owned subsidiary, Uptown National Bank of Chicago
("Uptown"), to provide to Executive certain of the benefits described herein.
21. EXECUTION IN COUNTERPARTS. This Agreement may be executed by the
parties hereto in two (2) or more counterparts, each of which shall be deemed to
be an original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
22. JURISDICTION AND GOVERNING LAW. Jurisdiction over disputes with regard
to this Agreement shall be exclusively in the courts of the State of Illinois,
and this Agreement shall be construed and interpreted in accordance with and
governed by the laws of the State of Illinois, without regard to the choice of
laws provisions of such laws.
23. SEVERABILITY. If any provision of this Agreement shall be adjudged by
any court of competent jurisdiction to be invalid or unenforceable for any
reason, such judgment shall not affect, impair or invalidate the remainder of
this Agreement. Furthermore, if the scope of any restriction or requirement
contained in this Agreement is too broad to permit enforcement of such
restriction or requirement to its full extent, then such restriction or
requirement shall be enforced to the maximum extent permitted by law, and
Executive consents and agrees that any court of competent jurisdiction may so
modify such scope in any proceeding brought to enforce such restriction or
requirement.
24. WAIVER. The waiver of any party hereto of a breach of any provision
of this Agreement by any other party shall not operate or be construed as a
waiver of any subsequent breach.
18
<PAGE>
25. AMENDMENT. No change, alteration or modification hereof may be made
except in a writing, signed by each of the parties hereto.
26. CONSTRUCTION. The language used in this Agreement will be deemed to be
the language chosen by Employer and Executive to express their mutual intent and
no rule of strict construction shall be applied against any person. Wherever
from the context it appears appropriate, each term stated in either the singular
of plural shall include the singular and the plural, and the pronouns stated in
either the masculine, the feminine or the neuter gender shall include the
masculine, feminine or neuter. The headings of the Paragraphs of this Agreement
are for reference purposes only and do not define or limit, and shall not be
used to interpret or construe the contents of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
UPBANCORP, INC.
By: /s/ Evy Alsaker
-----------------------------------
Its authorized officer
EXECUTIVE
/s/ Richard K. Ostrom
--------------------------------------
Name: Richard K. Ostrom
Title: Chairman, President and Chief
Executive Officer
Address: 1041 Linden
Wilmette, IL 60091-2727
19
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