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UPBANCORP, INC.
1997
UPBANCORP, INC.
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Consolidated Financial Highlights
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For the years ended December 31, 1997 1996 % Change
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Income: $ 1,977 $ 1,154 71%
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Per Share Data:
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Net income $ 8.96 $ 5.21 72%
Cash dividends declared 2.00 2.00 0%
Book value 95.15 85.44 11%
Market price 124.50 68.25 82%
Performance Ratios:
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Return on average assets 0.87% 0.54% 61%
Return on average shareholders' equity 9.98% 6.28% 59%
Balance Sheet Highlights:
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Average assets $ 227,079 $ 214,245 6%
Average loans, net of unearned discount 144,898 120,427 20%
Average deposits 198,842 186,253 7%
Average shareholders' equity 19,819 18,383 8%
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[GRAPHS]
UPBANCORP, INC.
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To Our Shareholders:
I am delighted to report the 1997 results for Upbancorp, Inc.
Again this year, we have combined the Form 10-K and Annual Report for your
review. Summarized below are the financial highlights as well as the
operational and technological advances made by the Company.
The Company continued to achieve improved financial trends. Net
income increased by 71% to $1,977 for the year ending December 31,1997. This
translates to a return on average assets of .87% and a return on average
shareholders' equity of 9.98%. The mix and composition of our balance sheet
continues to improve and the level of non-earning assets has again been
reduced, both factors providing an improved net interest margin. Our ratio of
loans as a percentage of deposits has improved to 84%, an increase of 25%
over the previous year. Further, the level of non-earning assets dropped 43%
during the year.
Last year, we reported on the initial phase of an opportunity
enhancement program entitled "Vision Unlimited". This endeavor has proven to
be successful in defining an ongoing pattern of efficient, results-oriented
processes that are continually reviewed within the Company. In addition,
every effort is made to ensure that all efficiencies are recognized between
the two financial institutions. For example, we are enhancing our
technological capabilities to cross-utilize every resource available to us.
This includes the purchase and installation of common hardware, software,
networks and account processing capabilities between the two Banks and the
Holding Company. I look forward to many positive results from these efforts.
The operational and technological enhancements, along with the
improvement in the Company's financial trends, are a direct result of the
hard work and team effort exhibited at each of the Banks over the past year.
We are very fortunate to have a team of professionals dedicated to common
goals of financial and operational success. I would like to recognize our
boards of directors and staff for a job well done.
The Upbancorp family is deeply saddened by the recent death of
Roger P. Eklund, our Chairman. Mr. Eklund devoted a great deal of time and
effort to our organization making immeasurable contributions over the
past 35 years. He had a great impact on many of our employees, customers
and shareholders. He will be sorely missed.
Maximization of shareholder value remains our foremost priority
and we are committed to demonstrate the improvements necessary to attain our
goal. I thank you, our shareholders, for your continued confidence and trust.
Sincerely yours,
Richard K. Ostrom
Chairman of the Board
President & Chief Executive Officer
UPTOWN NATIONAL
UPBANCORP, INC. BANK OF CHICAGO HERITAGE BANK
DIRECTORS DIRECTORS DIRECTORS
RICHARD K. OSTROM RICHARD K. OSTROM RICHARD K. OSTROM
CHAIRMAN OF THE BOARD, CHAIRMAN OF THE BOARD CHAIRMAN OF THE BOARD
PRESIDENT AND CHIEF EXECUTIVE
OFFICER, UPBANCORP, INC. STEPHEN W. EDWARDS JOHN D. BENTON
PRESIDENT
STEPHEN W. EDWARDS, CLU ROBERT P. GRIFFITHS BENTON-ROBB DEVELOPMENT
PRESIDENT PRESIDENT AND ASSOCIATES
PLANNED FUTURES, INC. CHIEF EXECUTIVE OFFICER (REAL ESTATE DEVELOPMENT
AND MANAGEMENT)
DELBERT R. ELLIS ALFRED E. HACKBARTH, JR
RETIRED DELBERT R. ELLIS
FORMER EXECUTIVE VICE PRESIDENT JAMES E. HERATY VICE CHAIRMAN OF THE BOARD
BANK OF AMERICA, ARIZONA
MARVIN L. KOCIAN JOHN E. FAHRENDORF, JR.
JOHN E. FAHRENDORF, JR. PRESIDENT AND CHIEF
VICE PRESIDENT EXECUTIVE OFFICER
UPBANCORP, INC.
ALFRED E. HACKBARTH, JR.
ROBERT P. GRIFFITHS
VICE PRESIDENT VICTOR A. ROOT
UPBANCORP, INC. PRESIDENT
VICTOR A. ROOT & ASSOCIATES
ALFRED E. HACKBARTH, JR. (CPA AND FINANCIAL CONSULTANT)
OWNER
A.E. HACKBARTH & ASSOCIATES
(ATTORNEYS & CPAS)
RETIRED PARTNER
ARTHUR ANDERSEN & CO., S.C.
JAMES E. HERATY
RETIRED
FORMER PRESIDENT
READY-MEN, INC.
MARVIN L. KOCIAN
PRESIDENT
KOMAR SCREW CORPORATION
B. ARTHUR RUSSELL
RETIRED
FORMER PRESIDENT
RUSSELL ENTERPRISES, INC.
(INVESTMENTS)
UPTOWN NATIONAL
UPBANCORP, INC. BANK OF CHICAGO HERITAGE BANK
OFFICERS MANAGEMENT MANAGEMENT
RICHARD K. OSTROM RICHARD K. OSTROM RICHARD K. OSTROM
CHAIRMAN OF THE BOARD, CHAIRMAN OF THE BOARD CHAIRMAN OF THE BOARD
PRESIDENT AND
CHIEF EXECUTIVE OFFICER ROBERT P. GRIFFITHS DELBERT R. ELLIS
PRESIDENT AND VICE CHAIRMAN OF THE BOARD
GLEN E. COUCHMAN CHIEF EXECUTIVE OFFICER
VICE PRESIDENT, JOHN E. FAHRENDORF, JR.
INFORMATION SYSTEMS EVY JOHANSEN PRESIDENT AND
SENIOR VICE PRESIDENT AND CASHIER CHIEF EXECUTIVE OFFICER
JOHN E. FAHRENDORF, JR. .
VICE PRESIDENT CARTER R. HUHTA KATHLEEN L. HARRIS
STEVEN D. OLSON SENIOR VICE PRESIDENT AND CASHIER
ROBERT P. GRIFFITHS SENIOR VICE PRESIDENTS
VICE PRESIDENT ROBERT W. GOLDWATER, JR.
REEM GHANEM SENIOR VICE PRESIDENT
KATHLEEN L. HARRIS JOHN C. LIVENSPARGER
VICE PRESIDENT AND PATRICIA L. PAPPAS ANTHONY M. ASHTON
CHIEF FINANCIAL OFFICER VICE PRESIDENTS DANIEL T. BERGIN
JEFFREY S. BIRKELO
EVY JOHANSEN MARLENE M. KUCERA TIMOTHY J. BRUNNER
VICE PRESIDENT, BONNIE J. OCHSNER J. THOMAS HAND
ADMINISTRATION DANIEL B. STARZYK SONDRA K. KOSKELA
ASSISTANT VICE PRESIDENTS MARK A. PURCELL
MARVIN L. KOCIAN JERI A. SAFCIK
VICE PRESIDENT AND FRANZ R. RAUSCH PHILLIP D. WILSON
ASSISTANT SECRETARY CONTROLLER VICE PRESIDENTS
PATRICIA A. TAYLOR
ASSISTANT VICE PRESIDENTS
MCGLADREY & PULLEN, LLP
IA IVERSEN + ASSOCIATES, INC.
AUDITORS
HINSHAW & CULBERTSON
LEGAL COUNSEL
(This page intentionally left blank)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 1997.
Commission file number 0-12292
UPBANCORP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 36-3207297
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4753 N. BROADWAY, CHICAGO, ILLINOIS 60640
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(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-$10
PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing for the
past 90 days. Yes X No
---
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 13, 1998 (based upon the closing price as of such
date), was approximately $17,697,916.
The number of shares outstanding of the registrant's common stock, $10.00 par
value, as of February 13, 1998 was 220,700.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to be held
April 14, 1998, are incorporated by reference into Part III of this Form 10-K.
UPBANCORP, INC.
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TABLE OF CONTENTS
PAGE
----
PART I
Item 1: Business...............................................................................................................3
Item 2: Properties.............................................................................................................7
Item 3: Legal Proceedings......................................................................................................8
Item 4: Submission of Matters to a Vote of Security Holders....................................................................8
PART II
Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters..............................................8
Item 6: Selected Financial Data................................................................................................9
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations.................................10
Item 8: Financial Statements and Supplementary Data...........................................................................22
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.................................42
PART III
Item 10: Directors and Executive Officers of the Registrant...................................................................42
Item 11: Executive Compensation...............................................................................................42
Item 12: Security Ownership of Certain Beneficial Owners and Management.......................................................42
Item 13: Certain Relationships and Related Transactions.......................................................................42
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................43
2
PART I
ITEM 1: BUSINESS
UPBANCORP, INC.
Upbancorp, Inc. ("Upbancorp" or the "Company") is a 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
$231 million at year-end 1997 and is headquartered 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 140
full-time equivalent employees at December 31, 1997.
SUBSIDIARY BANKS
The Company's affiliates consist of two full-service community banks,
which operate five banking offices in northern Chicago and metropolitan Phoenix.
Approximately 79% of its banking assets are related to Uptown with the remainder
related to Heritage.
Both Subsidiary Banks are engaged in the general commercial banking
business in addition to offering a complete range of retail banking services.
The Subsidiary Banks conduct a general banking business which embraces all of
the usual functions, both commercial and consumer, and which they may lawfully
provide, including, but not limited to: the acceptance of deposits to demand,
savings and time accounts and the servicing of such accounts; commercial,
industrial, consumer and real estate lending; safe deposit box operations; and
other banking services tailored for both commercial and retail clients.
Uptown has one wholly-owned subsidiary, Broadway Clark Building
Corporation ("BCBC"), which is an Illinois corporation. BCBC owns all of the
real estate that is used in connection with the operation of Uptown's business
with the exception of one facility, which is leased.
SUPERVISION AND REGULATION
The Company and its Subsidiary Banks are subject to regulation and
supervision by various governmental regulatory authorities including, but not
limited to, the Federal Reserve Board (the "FRB"), the Office of the Comptroller
of the Currency (the "OCC"), the Federal Deposit Insurance Corporation (the
"FDIC"), the Arizona State Banking Department, the Securities and Exchange
Commission (the "SEC"), the Internal Revenue Service and state taxing
authorities. Financial institutions and their holding companies are extensively
regulated under federal and state law. The effect of such statutes, regulations
and policies can be significant and cannot be predicted with a high degree of
certainty.
Federal and state laws and regulations generally applicable to
financial institutions, such as the Company and the Subsidiary Banks, regulate,
among other things, the scope of business, investments, reserves against
deposits, capital levels relative to operations, the nature and amount of
collateral for loans, the establishment of branches, mergers, consolidations and
dividends. This supervision and regulation is intended primarily for the
protection of the FDIC's Bank Insurance Fund and the depositors, rather than the
shareholders of financial institutions.
The Company is subject to supervision and regulation by the Board of
Governors of the Federal Reserve System, under the Bank Holding Company Act of
1956, as amended.
3
Uptown is chartered under the National Bank Act, as amended, and is
subject to the examination, supervision, reporting and enforcement requirements
of the OCC, as the chartering authority for national banks, and the FDIC as the
administrator of the Bank Insurance Fund. The Bank is a member of the Federal
Reserve System.
Heritage is chartered under the banking laws of Arizona and is
subject to the examination, supervision, reporting and enforcement requirements
of the Arizona State Banking Commission under the banking laws of Arizona and
the FDIC under the Federal Deposit Insurance Act, as amended.
The deposits of the Subsidiary Banks are insured by the Bank
Insurance Fund of the FDIC to the extent permitted by law.
The Company's common stock is registered with the SEC under the
Securities Act of 1934, as amended. Consequently, the Company is subject to the
information, proxy solicitation, insider trading and other restrictions and
requirements of the SEC under such act.
GOVERNMENTAL MONETARY POLICIES AND ECONOMIC CONDITIONS
The earnings of the Company are affected in important respects by
general economic conditions and also by the fiscal and monetary policies of the
federal government and its agencies. In particular, the FRB regulates the
national supply of bank credit in order to achieve, among other things, maximum
employment and a stable price level. Among the instruments of monetary policy
used by the FRB to implement these objectives are: open market transactions in
United States government securities, changes in the discount rate on member bank
borrowings and changes in reserve requirements against member bank deposits.
These means are used in varying combinations to influence overall growth of bank
loans, investments, and deposits, and they may also affect interest rates
charged on loans or paid for deposits.
Interest rate sensitivity has a major impact on the yields earned on
assets of the Subsidiary Banks. As market rates change, yields earned on assets
may not necessarily move to the same degree as rates paid on liabilities. For
this reason, the Subsidiary Banks attempt to minimize earnings volatility
related to fluctuations in interest rates through the use of formal
asset/liability management programs which identify imbalances between the
repricing of earning assets and funding sources, among other things.
In addition to the policy of the FRB, the Company's earnings are also
affected by the FDIC insurance premiums and the annual fees charged by the
various regulatory authorities. The Company cannot fully predict the nature or
the extent of any effect which such fiscal and monetary policies may have on its
business and earnings.
COMPETITION
The principal methods of competition between commercial banks is
generally expressed in terms of price, including interest rates paid on deposits
and interest rates charged on borrowings, fees charged on fiduciary services,
quality of services to customers, ease of access to services, and the offering
of additional services. More recently, technological advances such as
telebanking, point-of-sale debit cards and electronic data interchange have also
resulted in intensified competition with traditional banking distribution
systems.
Both Illinois and Arizona are highly competitive markets for banking
and related financial services. Since these areas are the Company's primary
focus markets, the Subsidiary Banks are exposed to varying types and levels of
competition. In general, each Subsidiary Bank competes, anticipates and responds
within each individual market area. Both Subsidiary Banks compete and rely
heavily on the high level of quality service provided to our customers. The
Company has seen the level of competition and number of competitors in its
market places increase in recent years and expects a continuation of these
competitive market conditions.
4
CAPITAL GUIDELINES
The FRB, the OCC and the FDIC have adopted risk-based capital
guidelines which provide a framework for assessing the adequacy of the capital
of banks and bank holding companies (collectively "banking institutions"). These
guidelines apply to all banking institutions regardless of size and are used in
the examination and supervisory process as well as in the analysis of
applications to be acted upon by the regulatory authorities. These guidelines
require banking institutions to maintain capital based on the credit risk of
their operations.
The risk-based capital guidelines are designed to require the
maintenance of capital commensurate with both on and off-balance sheet credit
risks. The minimum ratios established by the guidelines are based on both tier 1
and total capital to total risk-based assets. Total risk-based assets are
calculated by assigning each on-balance sheet asset and off-balance sheet item
to one of four risk categories depending on the nature of each item. The amount
of the items in each category is then multiplied by the risk-weight assigned to
that category (0%, 20%, 50% or 100%). Total risk-based assets equals the sum of
the resulting amounts. Tier 1 capital is generally defined as shareholders'
equity less intangible assets and total capital is generally defined to include
Tier 1 capital plus limited levels of the allowance for loan losses.
In addition to the risk-based capital requirements, the FRB, the OCC
and the FDIC require institutions to maintain a minimum leveraged-capital ratio
to supplement the risk-based capital guidelines. The leverage ratio is intended
to ensure that adequate capital is maintained against risks other than credit
risk.
The Company and the Subsidiary Banks exceed the minimum required
capital guidelines for both risk-based capital ratios and the leverage ratio at
December 31, 1997. A further discussion of the capital guidelines is included in
the Capital Resources section under Item 7 of this Form 10-K.
DIVIDENDS
GENERAL
In addition to the capital guidelines provided in the discussion
above, there are various national and state banking regulations which limit the
ability of the Subsidiary Banks to pay dividends. This limits the ability of the
Company to pay dividends. Since the Company is a legal entity, separate and
distinct from its affiliates, its dividends are not subject to such bank
regulatory guidelines. The holders of the Company's common stock are entitled to
receive such dividends as are declared by the Board of Directors. For a further
discussion of dividends, see Note 12 "Restrictions on Retained Earnings" in the
Notes to Consolidated Financial Statements found included under Item 8 of this
Form 10-K.
NATIONAL BANKING ASSOCIATION RESTRICTIONS
Uptown is a national banking association and is limited with respect
to the amount of dividends which it can pay to its shareholders under Sections
56 and 60 of the National Bank Act.
Section 56 restricts a national bank from paying dividends if it
would impair the institution's capital by barring any payments in excess of "net
profits then on hand". Section 56 further requires that a bank deduct losses and
bad debts from "net profits then on hand". It also specifies that a portion of a
bank's capital surplus account may be included as "net profits then on hand" to
the extent that it represents earnings from prior periods.
Section 60 requires the OCC's approval if the total of all dividends
declared in any calendar year will exceed the institution's net profits of that
year combined with its retained net profits of the preceding two years, less any
required transfers to surplus. In calculating its net profits under Section 60 a
national bank may not add back provisions made to its allowance for loan losses
nor deduct net charge-offs.
ARIZONA STATE-CHARTERED BANK RESTRICTIONS
5
Under the provisions of the Arizona Bank Code, dividends may not be
declared by state-chartered banks unless they are made in compliance within the
banking laws of Arizona. Additionally, the payment of dividends by a
state-chartered bank whose deposits are insured by the Bank Insurance Fund, is
affected by the requirement to maintain minimum capital pursuant to the capital
adequacy guidelines issued by the FDIC.
6
ITEM 2: PROPERTIES
The following table summarizes the Company and Subsidiary Banks'
properties by location:
AFFILIATE PROPERTY TYPE/LOCATION OWNERSHIP SQUARE FOOTAGE
- --------- ---------------------- --------- --------------
THE COMPANY 4753 N. Broadway - -
Chicago, Illinois
UPTOWN Main Office:
4753 N. Broadway Owned 149,000 (Note 1)
Chicago, Illinois
Banking Office:
6041 N. Clark Street Owned 2,100 (Note 1)
Chicago, Illinois
Banking Office:
5345 N. Sheridan Road Leased 1,500
Chicago, Illinois
HERITAGE Main Office:
4222 E. Camelback Road Leased 4,000
Suite J200
Phoenix, Arizona
Banking Office:
4222 E. Camelback Road Leased 4,000
Suite J100
Phoenix, Arizona
Banking Office:
1333 W. Broadway Owned 13,900
Tempe, Arizona
Franklin Mortgage Office:
4222 E. Camelback Road Leased 1,641
Suite H200
Phoenix, Arizona
In addition to the banking locations listed above, the Subsidiary
Banks own 12 automatic teller machines, strategically located within the
Subsidiaries' market places.
At December 31, 1997, the properties and equipment of the Company
had an aggregate net book value of approximately $5.7 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
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 1997.
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, 1997, there were 338 shareholders of
record. The following table sets forth common stock information during each
quarter of 1997 and 1996.
1997 1996
------------------------------------------- ---------------------------------------
Fourth Third Second First Fourth Third Second First
---------- --------- --------- --------- --------- --------- -------- --------
Market Price of
Common Stock:
High $ 124.50 $ 97.50 $ 80.00 $ 75.00 $ 68.25 $ 66.50 $ 70.00 $ 65.00
Low 99.00 82.00 71.00 67.50 65.00 64.50 63.50 60.00
Quarter-End 124.50 95.00 80.00 71.00 68.25 64.50 67.00 65.00
Cash Dividends per
Share 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50
A discussion regarding the regulatory restrictions applicable to the
Subsidiary Banks' ability to pay dividends is included in the Dividends Section
under Item 1 of this Form 10-K and Note 12 in the Notes to Consolidated
Financial Statements found under Item 8 of this Form 10-K.
8
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, 1997 is presented in the following table:
SELECTED FINANCIAL DATA YEARS ENDED DECEMBER 31,
------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995 1994 1993
------- -------- -------- -------- ---------
OPERATING RESULTS:
Interest income $17,722 $ 15,805 $ 15,312 $ 13,884 $ 13,292
Interest expense 6,115 5,425 5,383 4,884 5,112
------- -------- -------- -------- --------
Net interest income 11,607 10,380 9,929 9,000 8,180
Provision for loan losses 410 914 717 291 772
Other income 2,667 2,440 1,982 1,790 1,857
Other expense 10,760 10,059 9,551 9,447 8,618
------- -------- -------- -------- --------
Income before income taxes 3,104 1,847 1,643 1,052 647
Applicable income taxes 1,127 693 625 246 127
------- -------- -------- -------- --------
Net income before cumulative effect
of a change in accounting principle 1,977 1,154 1,018 806 520
Cumulative effect of a change in
accounting principle for income taxes - - - - 183
------- -------- -------- -------- --------
Net income $ 1,977 $ 1,154 $ 1,018 $ 806 $ 703
------- -------- -------- -------- --------
------- -------- -------- -------- --------
PER SHARE DATA:
Net income $ 8.96 $ 5.21 $ 4.59 $ 3.63 $ 3.14
Cash dividends declared 2.00 2.00 2.00 2.00 2.00
Dividend payout ratio 22.31% 38.39% 43.61% 55.09% 63.73%
Book value 95.15 85.44 83.04 78.00 80.56
Market price 124.50 68.25 60.00 57.50 52.25
BALANCE SHEET HIGHLIGHTS:
Assets $231,377 $226,395 $206,341 $210,234 $205,435
Loans, net of unearned discount 166,252 131,069 111,208 98,518 92,683
Deposits 198,132 195,302 180,773 186,087 184,935
Shareholders' equity 21,000 18,856 18,434 17,316 17,884
Average equity to average asset ratio 8.73% 8.58% 8.63% 8.49% 8.91%
PERFORMANCE RATIOS:
Return on average assets .87% .54% .49% .39% .35%
Return on average shareholders' equity 9.98% 6.28% 5.66% 4.55% 3.90%
9
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 1997 totaled $1,977 or
$8.96 per share. This is compared to net income and earnings per share of $1,154
or $5.21 and $1,018 or $4.59 for 1996 and 1995, respectively. The results of
1997 represent a 71% improvement in net income from 1996 and a 94% improvement
over 1995. 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 1997
was 9.98% as compared to 6.28% in 1996 and 5.66% in 1995. Return on average
assets for 1997 was .87% as compared to .54% in 1996 and .49% in 1995.
Non-performing loans decreased during the past three year
period. Non-performing loans totaled $1,148 or 0.69% of net loans at
December 31, 1997 as compared to $2,112 or 1.61% in 1996 and $3,799 or 3.42%
in 1995.
Upbancorp continues to maintain a strong capital base at December 31,
1997 as a result of the improving earnings level and the historical level of
shareholders' investment. Combined capital levels, as well as the individual
Subsidiary Banks' capital ratios, are above the regulatory established category
for "well-capitalized" institutions.
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 81% of the Company's net revenues in 1997. A detailed analysis
highlighting the changes in net interest income is provided in Table 2. Interest
earned on tax-exempt loans and investments is adjusted for comparative purposes
to a taxable equivalent basis using the federal tax rate of 34%, resulting in a
fully taxable equivalent (FTE) net interest income.
Net interest income on a fully taxable equivalent basis totaled
$11,720 in 1997 compared to $10,442 in 1996 and $9,972 in 1995. The significant
increase in net interest income in 1997 includes an increase of $1,259 due to
volume increases in 1997 following a $678 increase due to volume in 1996. The
1997 volume increase was fueled by the earnings assets added to the balance
sheet during 1997 coupled with a reduction in non-earning loans during the year.
Rate movements also increased net interest income by $3 after negatively
impacting net interest income by $174 in 1996.
10
Average interest earning assets increased by $12,277 or 6.22% for
1997 with increases of $24,471 in loans, net of unearned discount. Interest
bearing liabilities increased $8,261 or 5.20% for 1997; this increase included a
reduction of $1,391 in borrowed funds.
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 margin
measured on a fully taxable equivalent basis increased to 4.84% in 1997 from
4.62% in 1996 and 4.60% in 1995.
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
1997 1996 1995
------------------------- ------------------------ -------------------------
Average Yield/ Average Yield/ Average Yield/
ASSETS: Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- -------- ------- -------- -------- ------- -------- -------- -------
Investment securities:
Taxable $ 54,005 $ 3,263 6.04% $ 66,002 $ 3,930 5.95% $ 72,338 $ 4,318 5.97%
Non-taxable (1)(2) 2,189 236 10.78% 1,834 145 7.91% 1,668 128 7.67%
Federal funds sold 7,390 401 5.43% 8,588 451 5.25% 9,933 584 5.88%
Mortgages held-for-sale 1,262 83 6.58% 616 48 7.79% 580 46 7.93%
Loans, net of unearned
discount (2)(3) 144,898 13,852 9.56% 120,427 11,293 9.38% 106,404 10,279 9.66%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest earning
assets (1)(2)(3) $209,744 $17,835 8.50% $197,467 $15,867 8.04% $190,923 $15,355 8.04%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Cash and due from banks 8,633 8,366 8,628
Reserve for loan losses (1,700) (1,464) (1,749)
Other assets 10,402 9,876 10,567
-------- -------- --------
Total assets $227,079 $214,245 $208,369
-------- -------- --------
-------- -------- --------
LIABILITIES &
SHAREHOLDERS' EQUITY:
Savings, NOW and
money market deposits $101,227 $ 2,577 2.55% $ 98,437 $ 2,307 2.34% $102,400 $ 2,629 2.57%
Other time deposits 59,361 3,158 5.32% 52,499 2,674 5.09% 48,561 2,414 4.97%
Borrowed funds 6,521 380 5.83% 7,912 444 5.61% 5,585 340 6.09%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest bearing
liabilities $167,109 $ 6,115 3.66% $158,848 $ 5,425 3.42% $156,546 $ 5,383 3.44%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Demand deposits 38,254 35,317 32,439
Other liabilities 1,897 1,697 1,398
Shareholders' equity 19,819 18,383 17,986
-------- -------- --------
Total liabilities and
shareholders' equity $227,079 $214,245 $208,369
-------- -------- --------
-------- -------- --------
Net interest
income/margin (1)(3) $11,720 4.84% $10,442 4.62% $ 9,972 4.60%
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
Net interest income/earning
assets 5.59% 5.29% 5.22%
----- ----- -----
----- ----- -----
(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 1997, 1996 and 1995.
(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
$773, $648, and $895 for the years ended December 31, 1997, 1996, and
1995, respectively. At December 31, 1997, 1996, and 1995, deferred
loan and commitment fee income, net of direct loan origination costs,
totaled $244, $277, and $232, respectively.
11
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
1997 COMPARED TO 1996 Interest Income/Expense Increase/(Decrease) due to:
------------------------------- ---------------------------
Increase Volume/
1997 1996 (Decrease) Volume Rate Rate
--------- --------- ---------- -------- ----- -------
Investment securities:
Taxable $ 3,263 $ 3,930 $ (667) $ (714) $ 58 $(11)
Non-taxable (1) 236 145 91 28 53 10
Federal funds sold 401 451 (50) (63) 15 (2)
Mortgages held-for-sale 83 48 35 50 (7) (8)
Loans, net of unearned discount 13,852 11,293 2,559 2,295 220 45
------- ------- ------ ------ ---- ----
Total interest income (1) $17,835 $15,867 $1,968 $1,596 338 $ 34
------- ------- ------ ------ ---- ----
------- ------- ------ ------ ---- ----
Savings, NOW and money market deposits 2,577 2,307 270 65 199 6
Other time deposits 3,158 2,674 484 350 119 16
Borrowed funds 380 444 (64) (78) 17 (3)
------- ------- ------ ------ ---- ----
Total interest expense 6,115 5,425 690 337 335 18
------- ------- ------ ------ ---- ----
Net interest income $11,720 $10,442 $1,278 $1,259 $ 3 $ 16
------- ------- ------ ------ ---- ----
------- ------- ------ ------ ---- ----
1996 COMPARED TO 1995 Interest Income/Expense Increase/(Decrease) due to:
------------------------------- ---------------------------
Increase Volume/
1996 1995 (Decrease) Volume Rate Rate
--------- --------- ---------- -------- ----- -------
Investment securities:
Taxable $ 3,930 $ 4,318 $ (388) $ (378) $(11) $ 1
Non-taxable (1) 145 128 17 13 4 0
Federal funds sold 451 584 (133) (79) (62) 8
Mortgages held-for-sale 48 46 2 3 (1) -
Loans, net of unearned discount 11,293 10,279 1,014 1,355 (301) (40)
------- ------- ------ ------ ----- ----
Total interest income (1) $15,867 $15,355 $ 512 $ 914 $(371) $(31)
------- ------- ------ ------ ----- ----
------- ------- ------ ------ ----- ----
Savings, NOW and money market deposits 2,307 2,629 (322) (102) (229) 9
Other time deposits 2,674 2,414 260 196 59 5
Borrowed funds 444 340 104 142 (27) (11)
------- ------- ------ ------ ----- ----
Total interest expense 5,425 5,383 42 236 (197) 3
------- ------- ------ ------ ----- ----
Net interest income $10,442 $ 9,972 $ 470 $ 678 $(174) $(34)
------- ------- ------ ------ ----- ----
------- ------- ------ ------ ----- ----
(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 1997, for 1996 and 1995.
FUNDS MANAGEMENT ANALYSIS AND INTEREST RATE SENSITIVITY
The earning asset portfolio of community banks is typically the
leading determinate of performance for the institution. This is because the
largest percentage of total income for the bank is attributable to net interest
income. The policies and practices for managing liquidity risk and interest rate
risk are set by the Subsidiary Banks' Funds Management Committees ("FMCs") whose
goal is to ensure maximum returns within safe and sound risk parameters. The
FMCs monitor exposures in view of market developments and the Subsidiary Banks'
financial conditions, set guidance for interest rate risk management decisions,
ensure consistency in the measurement of risk and monitor liquidity and capital
adequacy. In this capacity, the FMCs place limits on the level of investments in
various assets and off-balance sheet instruments, as well as on the funding
levels for loans and deposits. In addition, the FMCs establish pricing policies
for the Subsidiary Banks' products and services.
12
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, 1997 is presented in
Table 3. Earning assets and interest bearing liabilities are presented within
selected time intervals based upon their repricing and maturity characteristics.
In a perfectly matched gap analysis, an equal amount of rate sensitive assets
and liabilities would be reflected as repricing within each given time interval.
A positive interest rate sensitivity gap indicates more assets than liabilities
will reprice in that time period, while a negative gap indicates more
liabilities will reprice. Generally, a positive gap position, or asset sensitive
position, has a favorable impact on net interest income in periods of rising
interest rates. Conversely, a negative gap would generally imply a favorable
impact on net interest income in periods of declining interest rates.
TABLE 3
REMAINING MATURITY OR EARLIEST POSSIBLE PRICING
Up to
3 3-12 1-3 3-5 Greater than
Months Months Years Years 5 Years Total
-------- ------- -------- -------- ------------- -----------
RATE SENSITIVE ASSETS:
Federal funds sold $ 500 $ - $ - $ - $ - $ 500
Investment securities - Debt (1) 11,803 9,650 1,203 15,572 5,128 43,356
Investment securities - Equity (1) - - - - 4,265 4,265
Loans and mortgages held-for-sale (1) 43,028 22,810 29,779 56,778 16,003 168,398
------- -------- -------- ------- ------- --------
Total Rate Sensitive Assets 55,331 32,460 30,982 72,350 25,396 216,519
------- -------- -------- ------- ------- --------
RATE SENSITIVE LIABILITIES:
Savings, NOW, and
money market deposits 28,553 11,417 21,446 26,290 10,953 98,659
Other time deposits 21,097 28,235 9,664 388 - 59,384
Borrowed funds 7,037 3,000 - - - 10,037
------- -------- -------- ------- ------- --------
Total Rate Sensitive Liabilities 56,687 42,652 31,110 26,678 10,953 168,080
------- -------- -------- ------- ------- --------
INTEREST SENSITIVITY GAP:
Incremental $(1,356) $(10,192) $ (128) $45,672 $14,443 $ 48,439
------- -------- -------- ------- ------- --------
------- -------- -------- ------- ------- --------
Cumulative $(1,356) $(11,548) $(11,676) $33,996 $48,439
CUMULATIVE INTEREST SENSITIVE
GAP AS A PERCENTAGE OF
TOTAL EARNING ASSETS -1% -5% -5% 16% 22%
(1) Loans and securities on a non-accrual basis are not included as a part of
this analysis.
Table 3 reflects the under-one-year net liability position at
December 31, 1997 was ($11,548) (4.99% of total assets), compared to the
under-one-year net asset position of $30,488 at December 31, 1996 (13.47% of
total assets). This measure would indicate a nearly balanced interest rate risk
position. 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
The following table shows the Company's available-for-sale investment
securities' maturity distribution and corresponding tax-equivalent portfolio
yields at December 31, 1997:
TABLE 4
SECURITIES AVAILABLE-FOR-SALE
MATURITY DISTRIBUTION AND PORTFOLIO YIELDS
One year One year Five years After
or less to five years to ten years ten years
--------------- --------------- --------------- -----------------
Book Yield Book Yield Book Yield Book Yield
Value (%) Value (%) Value (%) Value (%)
------- ------ ------- ------ ------- ------- ------- -------
U.S. Treasury securities $ 7,501 4.86% $ - - $ - - $ - -
U.S. Agency securities 2,189 5.54% 15,264 6.70% - - - -
States and political subdivisions 186 10.83% 55 6.82% 1,870 8.04% 1,478 8.34%
Other debt securities - - - - 502 6.31% - -
------- ------ ------- ------ ------ ----- ------ -----
Total $ 9,876 5.12% $15,319 6.70% $2,372 7.68% $1,478 8.34%
------- ------- ------ ------
------- ------- ------ ------
Book Yield
Value (%)
------ -------
Collateralized mortgage
obligations and other
mortgage-backed securities $14,206 6.11%
-------
-------
Equity securities $ 4,139 6.27%
-------
-------
Of the $14,206 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
1997 1996 1995 1994 1993
---------- --------- ---------- --------- ---------
Commercial - Aircraft related $ 17,846 $ 9,154 $ 492 $ - $ -
Commercial - Other 102,996 81,591 73,058 60,696 53,430
Real Estate 33,500 32,700 29,109 26,510 32,435
Consumer, net of unearned discount 11,910 7,624 8,549 11,312 6,818
-------- -------- -------- ------- -------
Total loans 166,252 131,069 111,208 98,518 92,683
Less: Allowance for loan losses (2,010) (1,485) (1,402) (1,605) (1,421)
-------- -------- -------- ------- -------
Total loans, net of allowance for loan losses $164,242 $129,584 $109,806 $96,913 $91,262
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
14
The commercial loan maturities and sensitivity to changes in interest
rates at December 31, 1997, are shown in the following table:
TABLE 6
COMMERCIAL LOAN MATURITIES AND SENSITIVITIES TO CHANGES IN INTEREST RATES
After one
In one year through Over
or less five years five years Total
----------- ----------- ---------- ----------
Commercial loan maturities $ 57,482 $ 50,752 $ 12,608 $ 120,842
-------- -------- -------- ---------
-------- -------- -------- ---------
Interest rate sensitivity:
Fixed rate $ 12,531 $ 50,752 $ 12,608 $ 75,891
Variable rate 44,951 - - 44,951
-------- -------- -------- ---------
Total $ 57,482 $ 50,752 $ 12,608 $ 120,842
-------- -------- -------- ---------
-------- -------- -------- ---------
LIQUIDITY MANAGEMENT
A key element of the Company's FMC process is the management of
liquidity. Liquid funds are needed by the Subsidiary Banks to meet the needs of
their depositors, borrowers and for regulatory requirements. Liquid funds,
however, generally have very low earnings potential and thus careful control of
the Subsidiary Banks' liquidity position is needed. Monitoring of this liquidity
position is done daily to ensure constant adequacy and to maintain optimal
levels of liquidity on the balance sheet. Another source of liquidity is off
balance sheet, in the form of pre-approved loan commitments from the Federal
Home Loan Bank and various correspondent banks. For a further review of the
Company's sources and uses of funds, see the Consolidated Statements of Cash
Flows found in Item 8 of this Form 10-K.
The Company requires adequate liquidity to pay its expenses and pay
shareholder dividends. Liquidity is provided to the parent from subsidiaries in
the form of dividends. Other liquidity is provided by cash balances in banks,
maturing investments and interest on investments. For a discussion of dividend
payments, please see Note 12 in the Notes to Consolidated Financial Statements
found in Item 8 of this Form 10-K. One method of analyzing the Company's
liquidity position is through a careful review of available funding sources. The
following table provides information as it pertains to funding sources and
reflects a year-to-year comparison of the sources of the Company's liability
funding based upon year-end balances.
TABLE 7
FUNDING SOURCES - YEAR-END BALANCES
1997 1996 1995
---------- ---------- ----------
Demand deposits $ 40,088 $ 40,009 $ 32,070
Savings, NOW & money market deposits 98,660 100,519 97,037
Other time deposits of $100 or less 44,409 42,190 39,756
--------- --------- ---------
Core deposits 183,157 182,718 168,863
Other time deposits of $100 or more 14,975 12,584 11,910
Borrowed funds 10,037 10,561 5,230
--------- --------- ---------
Total funding sources $ 208,169 $ 205,863 $ 186,003
--------- --------- ---------
--------- --------- ---------
Total funding sources increased 1.1% at December 31, 1997 from prior
year levels. Core deposits increased 0.2% from December 31, 1996 balances while
other time deposits $100 or more grew at a 19% rate. A recap of other time
deposits $100 and over is presented in the following table. For a review of
total other time deposit maturities, see Note 6 in the Notes to Consolidated
Financial Statements found in Item 8 of this Form 10-K.
15
TABLE 8
REMAINING MATURITY OF OTHER TIME DEPOSITS - $100,000 AND OVER
Three months or less $ 5,260
Over 3 through 6 months 5,518
Over 6 through 12 months 2,366
Over 12 months 1,831
-------
$14,975
-------
-------
Borrowing facilities are available to the Subsidiary Banks through
various correspondent banks in the amount of $15,000. 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 $15,938 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, 1997, all entities exceeded regulatory established
minimums as defined for "well-capitalized" institutions.
Total shareholders equity increased 11.37% to $21,000 at December 31,
1997. Total equity as a percentage of assets was 9.08% at the end of 1997 versus
8.33% a year earlier. Included in shareholders equity is the net unrealized gain
on securities classified as available-for-sale, which amounted to $19 at the end
of 1997. At the end of 1996, there was an unrealized loss of $589. Without the
impact of this component of shareholders equity, total shareholders equity would
have increased 7.89% in 1997.
Please see Note 13 in the Notes to Consolidated Financial
Statements found in Item 8 of this Form 10-K.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for
loan losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the loan principal is
unlikely. The level of the provision for loan losses charged to operating
expense as well as the balances maintained in the allowance for loan losses is
dependent upon many factors, including loan growth, changes in the composition
of the loan portfolio, net charge-off levels, delinquencies, collateral values
and management's assessment of current and prospective economic conditions in
the Company's primary market areas.
The Subsidiary Banks measure the allowance for loan losses on a
quarterly or more frequent basis using three measures of reserve adequacy. The
first measurement compares the allowance as a percentage of the total loan
portfolio. The second test measures the allowance against various loan pools, or
types, using historical and peer group reserve percentages for expectations of
possible loan losses on each category. The third is a detailed evaluation by all
loan officers of classified or non-performing loans to ensure that an adequate
allowance has been established for these individual assets.
The allowance for loan losses is comprised of both allocated and
unallocated allowances in order to quantify future loss potential. The allocated
position represents management's assessment as to potential loss exposure based
on both actual loan losses experienced historically and independent credit
ratings on individual credits. The unallocated portion is that which is not
specifically allocated to a particular loan or
16
general loan category. At December 31, 1997, the allowance for loan losses
was comprised of $1,140 and $870 of allocated and unallocated reserves,
respectively.
TABLE 9
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Balance at beginning of year $ 1,485 $ 1,402 $ 1,605 $ 1,421 $ 1,784
Loan charge-offs:
Commercial 12 256 403 204 781
Real estate 1 607 544 - 431
Consumer 15 33 1 2 36
------- ------- ------- ------- -------
Total charge-offs 28 896 948 206 1,248
Recoveries:
Commercial 55 62 25 82 87
Real estate 86 - - 9 11
Consumer 2 3 3 8 15
------- ------- ------- ------- -------
Total recoveries 143 65 28 99 113
Net charge-offs (115) 831 920 107 1,135
Provision for loan losses 410 914 717 291 772
------- ------- ------- ------- -------
Balance at end of year $ 2,010 $ 1,485 $ 1,402 $ 1,605 $ 1,421
------- ------- ------- ------- -------
------- ------- ------- ------- -------
As a percent of average loans:
Net loan charge-offs -0.08% 0.69% 0.86% 0.11% 1.13%
Provision for loan losses 0.28% 0.76% 0.67% 0.31% 0.77%
Allowance for loan losses
as a percentage of net loans: 1.21% 1.13% 1.26% 1.63% 1.53%
Allocation of allowance:
Commercial - Aircraft related 268 137 5 - -
Commercial - Other 772 765 841 972 962
Real estate 11 222 274 285 271
Consumer 89 107 102 99 41
Unallocated 870 254 180 249 147
------- ------- ------- ------- -------
Balance at end of year $ 2,010 $ 1,485 $ 1,402 $ 1,605 $ 1,421
------- ------- ------- ------- -------
------- ------- ------- ------- -------
As a percent of total loans:
Commercial - Aircraft related 11% 7% 0% 0% 0%
Commercial - Other 62% 62% 66% 61% 57%
Real estate 20% 25% 26% 27% 35%
Consumer 7% 6% 8% 12% 8%
As indicated by this table, the provision for loan losses amounted to
$410 for 1997 compared to $914 in 1996 and $717 in 1995. This decrease in the
1997 provision is reflective of improved loan quality offset by the Company's
loan growth.
The allowance for loan losses amounted to $2,010 for 1997 compared to
$1,485 in 1996 and $1,402 in 1995. Allowance levels are the result of the
Company's careful analysis of potential loan losses, the adequacy level as
defined by management's internal analysis and the favorable trends in
non-performing loans.
17
NON-PERFORMING ASSETS
One measurement used by management in assessing the risk inherent in
the loan portfolio is the level of non-performing assets. Non-performing assets
consist of both non-accrual loans, investments and other real estate owned.
Non-accrual loans are those loans which have been determined to have reasonable
doubt as to the timely collectibility of interest or principal. Other real
estate owned ("OREO") represents real property which has been acquired through
foreclosure or real estate which a Subsidiary Bank has obtained possession of in
satisfaction of a debt. OREO is carried at the lower of the recorded investment
value of the loan or the estimated fair market value, less estimated disposal
costs, of the related real estate. Past due loans are loans whose principal and
interest payments are delinquent 90 days or more and are still accruing
interest.
The following table summarizes non-performing assets and past due
loans for the past five years as well as certain information related to interest
income on non-accrual loans:
TABLE 10
ANALYSIS OF NON-PERFORMING ASSETS AND PAST DUE LOANS
December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Non-accrual loans $ 252 $ 1,158 $ 2,369 $ 3,637 $ 3,135
Restructured loans 896 954 1,430 312 792
------- ------- ------- ------- -------
Total non-performing loans 1,148 2,112 3,799 3,949 3,927
Non-performing securities, at market - 134 134 - -
Other real estate owned 334 334 1,343 335 1,497
------- ------- ------- ------- -------
Total non-performing assets $ 1,482 $ 2,580 $ 5,276 $ 4,284 $ 5,424
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Percentage of non-performing loans/loans,
net of unearned discount 0.69% 1.61% 3.42% 4.01% 4.24%
Percentage of non-performing assets/total assets 0.64% 1.14% 2.56% 2.04% 2.64%
Past due loans, not included above $ - $ 5 $ 4 $ 3 $ 13
Percentage of total net loans 0.00% 0.00% 0.00% 0.00% 0.01%
Percentage of total assets 0.00% 0.00% 0.00% 0.00% 0.00%
Interest income not recognized due to
non-accrual status of loans $ 64 $ 282 $ 419 $ 309 $ 305
Non-performing assets have decreased for five consecutive years and
have reached their lowest level in 13 years. This trend is a result of a strong
economy and the effectiveness of the Company's Subsidiary Banks' loan
administration and workout procedures. As shown in Table 10, at December 31,
1997, non-performing assets totaled $1,482, a $1,098 decrease from 1996. This
decrease is primarily a result of a reduction in non-accrual loans which
decreased $906 at year-end 1997 to $252 from $1,158 in 1996. As a result, the
percentage of non-performing assets as a percentage of total assets was reduced
44% to 0.64%.
NON-INTEREST INCOME
Non-interest income consists primarily of service charges on customer
deposit accounts and fees earned from mortgage banking activities. Total
non-interest income increased 9.3% to $2,667 in 1997 compared to 1996. The
continued improvement in non-interest income reflects the continued
diversification of our sources of revenue. The following table analyzes the
various sources of non-interest income for the years ended December 31, 1995
through 1997.
18
TABLE 11
NON-INTEREST INCOME COMPONENTS
December 31,
--------------------------------------
1997 1996 1995
------- ------- -------
Service charges on deposit accounts $ 1,215 $ 1,247 $ 1,131
Mortgage banking fees 907 625 402
Net loss on securities (107) (105) (86)
Other non-interest income 475 470 394
Net gains from sale of loans 177 203 141
------- ------- -------
Total non-interest income $ 2,667 $ 2,440 $ 1,982
------- ------- -------
------- ------- -------
Service charges on deposit accounts, the largest component of
non-interest income, consists of fees on both interest bearing and non-interest
bearing deposit accounts and charges for items such as insufficient funds,
overdrafts and stop payment requests. These charges decreased 2.6% in 1997 over
1996 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 and does not affect Heritage's capital levels. Heritage
does not retain servicing rights to these mortgage loans sold. Mortgage banking
fee income of $907, an increase of 45%, was recognized in 1997 along with
interest income of $83.
Net investment securities gains (losses) result from the sale of
securities from the investment portfolio. The valuation allowance represents
writedowns established on securities which have experienced an other than
temporary deterioration in their market value. For a review of gains and losses
related to the investment portfolio, see Note 3 in the Notes to Consolidated
Financial Statements found in Item 8 of this Form 10-K.
NON-INTEREST EXPENSE
Total non-interest expense increased $701, or 6.97%, in 1997 after
increasing $508, or 5.32% in 1996. This is reflective of the incremental
increase in salaries and benefits which result from the necessary staffing
enhancements due to the 20% growth pattern in average loans, net, as well as a
7% increase in average deposits. In addition, increases have been recognized
with the sale of mortgage loans as well as the participation of various
commercial loans to other banking institutions, neither of these are carried
within the balance sheet asset amounts however have resulted in increased
staffing requirements. 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, 1997, the Company had a
75% efficiency ratio as compared to 78% for the prior year's period. The
following table analyzes the various components of non-interest expense for the
years ended December 31, 1995 through 1997.
19
TABLE 12
NON-INTEREST EXPENSE COMPONENTS
December 31,
----------------------------------------------
1997 1996 1995
------- ------- -------
Salaries and employee benefits:
Core bank employees $ 5,432 $ 5,113 $ 4,835
Mortgage lending group 666 499 374
------- ------- -------
Total 6,098 5,612 5,209
------- ------- -------
Occupancy expense, net 680 514 610
Equipment expense 579 780 742
Outside fees and services 979 735 649
Advertising and business
development expense 316 322 354
Supplies expense 244 218 217
Data processing expense 271 269 218
Regulatory services/fees 98 85 300
Other operating expense 1,495 1,524 1,252
------- ------- -------
Total non-interest expense $10,760 $10,059 $ 9,551
------- ------- -------
------- ------- -------
Salaries and benefits have experienced relatively moderate increases
over the past three years. Core employees deliver all services except mortgage
banking. Mortgage banking activities, where loans are sold into the secondary
market, contributed to interest and fee income of the Subsidiary Banks of $990
in 1997 compared to $673 in 1996.
A slight increase of $215 was recognized in non-interest expense
other than salaries and employee benefits, from $4,447 at December 31, 1996 to
$4,662 at December 31, 1997. An increase in outside fees and services of $244
resulted from fees paid in connection with the opportunity enhancement program
which was started and completed in 1997. 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
Registrant's actual results to differ materially include, but are not limited
to, the following:
- Federal and state legislative and regulatory developments;
- Changes in management's estimate of the adequacy of the allowance
for loan losses (and/or other significant estimates such as OREO,
deferred tax valuation allowance, etc.);
- Changes in the level and direction of loan delinquencies and
write-offs;
- Interest rate movements and their impact on customer behavior and
Upbancorp's net interest margin;
- The impact of repricing and competitors' pricing initiatives on
loan and deposit products;
- Upbancorp's ability to adapt successfully to technological changes
to meet customers' needs and developments in the marketplace;
- Upbancorp's ability to access cost effective funding; and
- Economic conditions.
20
YEAR 2000
The Company has developed a plan to address Year 2000 related issues.
The plan has five phases that include (1) awareness of Year 2000 issues, (2)
identification and inventory of Year 2000 issues, (3) development of solutions
including contingency plans, (4) implementation of solutions and (5) testing.
Approximately 110 different issues and software systems have been inventoried as
having possible Year 2000 impact. These issues range from forms to alarm systems
to core applications software. Plans are being put in place to test and address
each of these items. To ensure compliance for the bank core data processing
systems, there will be a conversion to an outsourced solution in the spring of
1998. This will encompass all loan, deposit and financial reporting aspects of
the banking operation.
This risk goes beyond the internal items and also involves all of our
vendors and customers. We will be conducting education sessions for our
customers in 1998 to alert them to the potential problems they could encounter.
This will not eliminate this type of Year 2000 risk and the Company could be
adversely affected if the vendors and customers do not adequately address their
own Year 2000 issues.
Contingency plans are being developed for critical business
applications in order to mitigate potential problems and/or delays associated
with implementation of new solutions or delivery of products and services.
21
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Upbancorp, Inc.
Consolidated Statements of Condition
December 31, (DOLLARS IN THOUSANDS) 1997 1996
- -----------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 6,678 $ 9,804
Federal funds sold 500 9,550
Securities held-to-maturity 200 -
(FAIR VALUE OF $201 AND $0 IN 1997 AND 1996)
Securities available-for-sale 47,421 65,856
Mortgages held-for-sale 2,146 1,001
Loans, net of allowance for loan losses of
$2,010 and $1,485 in 1997 and 1996 164,242 129,584
Premises and equipment, net 5,675 5,501
Accrued interest and other assets 4,515 5,099
--------- ---------
Total Assets $ 231,377 $ 226,395
--------- ---------
--------- ---------
Liabilities and Shareholders' Equity
Liabilities
Demand deposits $ 40,088 $ 40,009
Savings, NOW and money market deposits 98,660 100,519
Other time deposits 59,384 54,774
--------- ---------
Total deposits 198,132 195,302
Borrowed funds 10,037 10,561
Accrued interest and other liabilities 2,208 1,676
--------- ---------
Total Liabilities 210,377 207,539
--------- ---------
Shareholders' Equity
Common stock, $10 par value: 300,000 shares authorized;
250,000 issued in 1997 and 1996 2,500 2,500
Additional paid in capital 3,000 3,000
Retained earnings 16,961 15,425
Treasury stock - 29,300 shares in 1997 and 1996 (1,480) (1,480)
Unrealized gain(loss) on securities available-for-sale,
net of tax of $12 and $(376) in 1997 and 1996 19 (589)
--------- ---------
Total Shareholders' Equity 21,000 18,856
--------- ---------
Total Liabilities and Shareholders' Equity $ 231,377 $ 226,395
--------- ---------
--------- ---------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
22
Upbancorp, Inc.
Consolidated Statements of Income
Years ended December 31, (DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA) 1997 1996 1995
- -------------------------------------------------------------------------------------------
Interest Income
Interest and fees on loans $ 13,852 $ 11,293 $ 10,279
Interest on mortgages held-for-sale 83 48 46
Interest on short-term investments 401 451 584
Interest on investments:
Taxable 3,263 3,930 4,318
Non-taxable 123 83 85
-------- -------- --------
Total interest income 17,722 15,805 15,312
-------- -------- --------
Interest Expense
Interest on savings, NOW, and money market deposits 2,577 2,307 2,629
Interest on other time deposits 3,158 2,674 2,414
Interest on borrowed funds 380 444 340
-------- -------- --------
Total interest expense 6,115 5,425 5,383
-------- -------- --------
Net Interest Income 11,607 10,380 9,929
Provision for Loan Losses 410 914 717
-------- -------- --------
Net Interest Income after Provision for Loan Losses 11,197 9,466 9,212
-------- -------- --------
Non-Interest Income
Service charges on deposit accounts 1,215 1,247 1,131
Mortgage banking fees 907 625 402
Other non-interest income 475 470 394
Net gains from sale of loans 177 203 141
Net loss on securities (107) (105) (86)
-------- -------- --------
Total non-interest income 2,667 2,440 1,982
-------- -------- --------
Non-Interest Expense
Salaries and employee benefits 6,098 5,612 5,209
Net occupancy expense 680 514 610
Equipment expense 579 780 742
Outside fees and services 979 735 649
Advertising and business development expenses 316 322 354
Supplies expense 244 218 217
Data processing expense 271 269 218
Regulatory services/fees 98 85 300
Other operating expense 1,495 1,524 1,252
-------- -------- --------
Total non-interest expense 10,760 10,059 9,551
-------- -------- --------
Income Before Income Taxes 3,104 1,847 1,643
Income tax provision 1,127 693 625
-------- -------- --------
Net Income $ 1,977 $ 1,154 $ 1,018
-------- -------- --------
-------- -------- --------
Basic earnings per share $ 8.96 $ 5.21 $ 4.59
-------- -------- --------
-------- -------- --------
Weighted average shares outstanding 220,700 221,435 222,000
-------- -------- --------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
23
Upbancorp, Inc.
Consolidated Statements of Cash Flow
Years ended December 31, (DOLLARS IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net Income $ 1,977 $ 1,154 $ 1,018
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 410 914 717
Depreciation and amortization 965 929 1,061
Net loss on securities 107 105 86
Net gains on sale of mortgage loans (177) (203) (141)
Net gains on sale of other real estate owned - (21) -
Change in deferred income taxes 171 163 45
Amortization on investment securities, net (342) (326) (213)
Originations of mortgages held-for-sale (38,262) (25,627) (40,365)
Proceeds from sales of mortgages held-for-sale 37,294 27,778 37,557
Changes in assets and liabilities:
Increase in accrued interest and other assets (17) (52) (250)
Increase (decrease) in accrued interest and other liabilities 532 (228) 827
-------- -------- --------
Net cash provided by operating activities 2,658 4,586 342
-------- -------- --------
Cash Flows from Investing Activities:
Net (increase) decrease in federal funds sold 9,050 (1,450) 905
Purchases of available-for-sale securities (23,803) (34,786) (4,857)
Proceeds from maturities and redemptions
of available-for-sale securities 27,319 22,236 7,022
Proceeds from sale of available-for-sale securities 16,150 12,386 6,983
Purchases of held-to-maturity securities (200) - (1,559)
Proceeds from maturities and
redemptions of held-to-maturity securities - 415 8,059
Net increase in loans (35,068) (21,149) (14,618)
Purchases of premises and equipment (1,097) (608) (725)
Proceeds from sale of other real estate - 1,487 -
-------- -------- --------
Net cash provided by (used in) investing activities (7,649) (21,469) 1,210
-------- -------- --------
Cash Flows from Financing Activities
Net increase (decrease) in total deposits 2,830 14,529 (5,314)
Net increase (decrease) in borrowed funds (524) 5,331 (526)
Cash dividends paid (441) (443) (444)
Purchase of treasury stock - (86) -
-------- --------- ---------
Net cash provided by (used in) financing activities 1,865 19,331 (6,284)
-------- --------- ---------
Net increase (decrease) in cash and due from banks (3,126) 2,448 (4,732)
Cash and due from banks at beginning of year 9,804 7,356 12,088
-------- -------- --------
Cash and due from banks at end of year $ 6,678 $ 9,804 $ 7,356
-------- -------- --------
-------- -------- --------
Supplemental disclosure of cash flow information:
Cash payments: Interest $ 5,936 $ 5,396 $ 5,229
Income taxes 826 701 166
Supplemental schedule of non-cash investing activities:
Other real estate acquired in settlement of loans $ - $ 457 $ 1,008
-------- -------- --------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
24
Upbancorp, Inc.
Consolidated Statements of Changes in Shareholders' Equity
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Unrealized
Gain (Loss)
Additional on Securities
Common Paid In Retained Treasury Available-for-
Stock Capital Earnings Stock Sale, net of tax Total
-----------------------------------------------------------------------
Balance, December 31, 1994 2,500 3,000 14,140 (1,394) (930) 17,316
Net income for the year 1,018 1,018
Cash dividends: $2.00 per share (444) (444)
Net unrealized gain (loss) on securities
available-for-sale, net of tax of $348 544 544
------- ------- ------- ------- ------ --------
Balance, December 31, 1995 $ 2,500 $ 3,000 $14,714 $(1,394) $ (386) $ 18,434
------- ------- ------- ------- ------ --------
Net income for the year 1,154 1,154
Cash dividends: $2.00 per share (443) (443)
Net unrealized gain (loss) on securities
available-for-sale, net of tax of $(130) (203) (203)
Purchase of treasury stock (86) (86)
------- ------- ------- ------- ------ --------
Balance, December 31, 1996 $ 2,500 $ 3,000 $15,425 $(1,480) $ (589) $ 18,856
------- ------- ------- ------- ------ --------
Net income for the year 1,977 1,977
Cash dividends: $2.00 per share (441) (441)
Net unrealized gain (loss) on securities
available-for-sale, net of tax of $388 608 608
------- ------- ------- ------- ------ --------
Balance, December 31, 1997 $ 2,500 $ 3,000 $16,961 $(1,480) $ 19 $ 21,000
------- ------- ------- ------- ------ --------
------- ------- ------- ------- ------ --------
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, 1997, 1996 and 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
Upbancorp, Inc. ("Upbancorp" or the "Company"), is a multi-bank
holding company, organized in 1983 under the laws of the State of Delaware. The
Company owns all of the outstanding common stock of Uptown National Bank of
Chicago ("Uptown"), organized in 1929 and located in Chicago, Illinois, and
Heritage Bank ("Heritage"), organized in 1977 and located in Phoenix, Arizona.
Upbancorp does not engage in any activities other than providing administrative
services and acting as a holding company for its Subsidiary Banks.
The Company's affiliates consist of two full-service community banks,
which operate five banking offices in northern Chicago and metropolitan Phoenix.
Both Subsidiary Banks are engaged in the general commercial banking business in
addition to offering a complete range of retail banking services. The Subsidiary
Banks conduct general banking business which embraces all of the usual
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
one facility.
25
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.
SECURITIES:
Securities classified as held-to-maturity are those debt securities
for which the 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 shareholders'
equity net of the related deferred tax effect. The amortization of premiums and
accretion of discounts, computed by the interest method over their contractual
lives, are recognized in interest income.
Realized gains or losses, determined on the basis of the cost of
specific securities sold, are included in earnings.
Declines in the fair value of individual securities classified as
either held-to-maturity or available-for-sale below their amortized cost that
are determined to be other than temporary, result in write-downs of the
individual securities to their fair value with the resulting write-downs
included in current earnings as realized losses.
MORTGAGES HELD-FOR-SALE:
The Company routinely sells to investors its originated residential
mortgage loans and retains no servicing rights relating to these mortgages sold.
Mortgage activity includes both mortgages held-for-sale which are held for a
period of 5-10 days, all with pre-purchase agreements, in addition to loans sold
directly into the secondary market. Mortgages held-for-sale are carried at the
lower of cost or market for a period of up to ten days with interest income
recognized for that period. Mortgage banking fees are recorded at the date of
purchase. For purposes of this report, mortgages held-for-sale and mortgage
banking fees relate only to these two types of mortgage activities; not to
mortgages which are originated, booked and serviced by the Company. All sales
are made without recourse.
26
LOANS AND ALLOWANCE FOR LOAN LOSSES:
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding unpaid principal balances reduced by any charge-offs or specific
valuation accounts and net of unearned discount, deferred loan fees and the
allowance for loan losses.
Loan origination and commitment fees are deferred and the net amount
is accreted as an adjustment of the loan yield over the contractual life of the
related loans. Commitment fees based upon a percentage of a customer's unused
line of credit and fees related to standby letters of credit are recognized over
the commitment period.
Unearned interest on discounted loans is accreted to income over the
life of the loans, using the sum-of-month's digits method which approximates the
level yield method. For all other loans, interest is accrued daily on the
outstanding balances. The accrual of interest is discontinued on loans past due
90 days or more. For impaired loans, accrual of interest is discontinued when
management believes, after considering collection efforts and other factors,
that the borrower's financial condition is such that collection of interest is
doubtful. Interest income on these loans is recognized to the extent interest
payments are received and the principal is considered fully collectible.
A loan is impaired when it is probable the Subsidiary Bank will be
unable to collect all contractual principal and interest payments due in
accordance with the terms of the loan agreement. Impaired loans are measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or at the fair value of the collateral if the
loan is collateral dependent. When the measure of the impaired loan is less than
the recorded investment in the loan, the impairment, as well as any subsequent
changes, is recorded through a valuation allowance included in the allowance for
loan losses. The Company considers consumer loans and residential real estate
loans to be smaller homogeneous loans that are not considered as impaired loans.
All other loan types are accounted for as impaired loans when they meet the
above criteria.
The allowance for loan losses is established through a provision for
loan losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb estimated losses on existing loans, based on an evaluation of the
collectibility of loans and prior loss experience. This evaluation also takes
into consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrower's ability to pay. While
management uses the best information available to make its evaluation, future
adjustments to the allowance may be necessary if there are significant changes
in economic conditions. In addition, various regulatory agencies periodically
review the allowance for loan losses. These agencies may require the Banks to
make additions to the allowance for loan losses based on their judgments of
collectibility after reviewing the information available to them at the time of
their examination.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed principally by the straight-line method
over their estimated useful lives.
GOODWILL:
Goodwill arising from the acquisition of Heritage is being amortized
on a straight-line basis through 2002. As of December 31, 1997 and 1996,
goodwill of $233 and $276, net of accumulated amortization, is included in other
assets in the consolidation statements of condition.
27
INCOME TAXES:
The Company files a consolidated tax return with its subsidiaries.
Its share of the consolidated income tax provision is computed on a separate
return basis. Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The followi