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, 2002.
Commission file number 0-12292
UPBANCORP, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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36-3207297 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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4753 N. Broadway, Chicago, Illinois |
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60640 |
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(Address of principal executive offices) |
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(Zip Code) |
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Registrant’s telephone number, including area code (773) 878-2000 |
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Securities registered pursuant to Section 12(b) of the Act: None |
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Securities registered pursuant to Section 12(g) of the Act: Common Stock-$1 par value |
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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 ý No o
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. ý
Indicated by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)
Yes o No ý
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 28,2002 (based upon the closing price as of that date), was approximately $28,786,164.
The number of shares outstanding of the registrant’s common stock, $1.00 par value, as of March 7, 2003, was 835,055.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2003 annual shareholders meeting are incorporated by reference into Part III of this Form 10-K.
Upbancorp, Inc.
Table of Contents
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UPBANCORP, INC.
Upbancorp, Inc. (“Upbancorp” or the “Company”), is a bank holding company organized in 1983 under the laws of the State of Delaware. Upbancorp owns all of the outstanding common stock of Uptown National Bank of Chicago (“Subsidiary Bank” or “Uptown”), organized in 1929 and located in Chicago, Illinois. Branches of Uptown located in the metropolitan Phoenix area operate under the name of Heritage Bank (“Heritage”). Heritage was organized in 1977 and was acquired by the Company in 1988. Heritage was merged into Uptown in 2000. Upbancorp does not engage in any activities other than providing administrative services and acting as a holding company for Uptown.
The Company is a publicly traded banking company with total assets of $407 million at year-end 2002 and its headquarters are in Chicago, Illinois. The majority of the operational responsibilities of the Subsidiary Bank rest with its Officers and Directors.
The Company and its Subsidiary Bank employed approximately 137 full-time equivalent employees at December 31, 2002.
Based on the Company’s approach to decision making, it has decided that its business is comprised of a single segment.
SUBSIDIARY BANK
Uptown is a full-service community bank, which operates seven banking offices and one loan production office in the Chicagoland area and metropolitan Phoenix area. Approximately 71% of its deposits are related to Uptown, with the remainder related to Heritage.
The Subsidiary Bank is engaged in the general commercial banking business in addition to offering a complete range of retail banking services. Uptown conducts a general banking business which embraces all of the usual functions, both commercial and consumer, and which they may lawfully provide, including, but not limited to: the acceptance of deposits to demand, savings and time accounts and the servicing of such accounts; commercial, industrial, consumer and real estate lending; safe deposit box operations; and other banking services tailored for both commercial and retail clients.
Uptown has one wholly-owned subsidiary, Broadway Clark Building Corporation (“BCBC”), which is an Illinois corporation. BCBC owns all of the real estate used in connection with the operation of Uptown’s business in the Chicagoland area with the exception of four facilities, which are leased.
The Company and its Subsidiary Bank are subject to regulation and supervision by various governmental regulatory authorities including, but not limited to, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), the Office of the Comptroller of the Currency (the “OCC”), the Federal Deposit Insurance Corporation (the “FDIC”), the Securities and Exchange Commission (the “SEC”), the Internal Revenue Service and state taxing authorities. Financial institutions and their holding companies are extensively regulated under federal and state law. The effect of such statutes, regulations and policies can be significant and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial institutions, such as the Company and the Subsidiary Bank, regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. This 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 Federal Reserve Board, 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. Uptown is a member of the Federal Reserve System.
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The deposits of the Subsidiary Bank are insured by the Bank Insurance Fund of the FDIC to the extent permitted by law.
The Company’s common stock is registered with the SEC under the Securities Act of 1934, as amended. Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under such act.
The following references to material statutes and regulations affecting the Company and the Bank are brief summaries thereof and are qualified in their entirety by reference to such statutes and regulations. Any change in applicable law or regulations may have a material effect on the business of the Company and the Bank.
Illinois bank holding companies are permitted to acquire banks and bank holding companies, and be acquired by bank holding companies, located in any state which authorizes such acquisitions under qualifications and conditions which are not unduly restrictive, as determined by the Commissioner of Illinois, when compared to those imposed under Illinois law.
Under interstate banking legislation, adequately capitalized and managed bank holding companies are permitted to acquire control of a bank in any state. States, however, may prohibit acquisitions of banks that have not been in existence for at least five years. The Federal Reserve Board is prohibited from approving an application if the applicant controls more than 10 percent of the total amount of deposits of insured depository institutions nationwide. In addition, interstate acquisitions may also be subject to statewide concentration limits.
The Federal Reserve Board would be prohibited from approving an application if, prior to consummation, the applicant controls any insured institution or branch in the home state of the target bank, and the applicant, following consummation, would control 30 percent or more of the total amount of deposits of insured depository institutions in that state. This legislation also provides that the provisions on concentration limits do not affect the authority of any state to limit the percentage of the total amount of deposits in the state which would be held or controlled by any bank or bank holding company to the extent the application of this limitation does not discriminate against out-of-state institutions. States may also waive the statewide concentration limit. The legislation authorizes the Federal Reserve Board to approve an application without regard to the 30 percent statewide concentration limit, if the state allows a greater percentage of total deposits to be so controlled, or the acquisition is approved by the state bank regulator and the standard on which such approval is based does not have the effect of discriminating against out-of-state institutions.
Interstate branching under the Interstate Banking and Branching Act (the “Branching Act”) permits banks to merge across state lines, thereby creating a bank headquartered in one state with branches in other states. Approval of interstate bank mergers is subject to certain conditions including: adequate capitalization; adequate management; Community Reinvestment Act compliance; deposit concentration limits (as set forth above); and compliance with federal and state antitrust laws. An interstate merger transaction may involve the acquisition of a branch without the acquisition of the bank only if the law of the state in which the branch is located permits out-of-state banks to acquire a branch of a bank in that state without acquiring the bank. Following the consummation of an interstate transaction, the resulting bank may establish additional branches at any location where any bank involved in the transaction could have established a branch under applicable federal or state law, if such bank had not been a party to the merger transaction.
Interstate branching is required to comply with host state community reinvestment, consumer protection, fair lending, and intrastate branching laws, as if the branch were chartered by the host state. All other laws of the host state apply to the branch to the same extent as if the branch were a bank, the main office being located in the host state.
The interstate branching by merger provisions became effective on June 1, 1997, and allowed each state, prior to the effective date, the opportunity to “opt out, “ thereby prohibiting interstate branching within that state. Of those states in which the Company’s banking subsidiaries are located (Illinois and Arizona), neither has adopted legislation to “opt out” of the interstate branching provisions. Furthermore, pursuant to the Branching Act, a bank is now able to add new branches in a state in which it does not already have banking operations if such state enacts a law permitting such de novo branching.
The effects on the Company of the changes in interstate banking and branching laws cannot be accurately predicted, but it is likely there will be increased competition from national and regional banking firms headquartered outside of Illinois and Arizona.
The Illinois legislature has also considered the adoption of legislation aimed at curbing what some legislators and consumer-oriented advocacy groups consider to be predatory lending practices by some mortgage brokers and
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other lenders active in the State of Illinois. “Predatory” lending consists of fraudulent and deceptive sales practices that occur when borrowers are pressured into taking out loans they do not need or cannot afford.
The Commissioner of Illinois has adopted predatory lending regulations. These regulations apply to “high cost” mortgages which are defined as mortgages which exceed a specified interest rate or are assessed points in excess of a specified minimum. Once any of these thresholds is reached, the regulations impose certain restrictions on the lender including obligating the lender to verify the borrower’s ability to repay the loan based on the borrower’s income and debt obligations; prohibiting deceptive refinancing known as loan flipping where a lender refinances existing loans, charging additional points and fees, without any financial benefit to the consumer; prohibiting the financing of a single premium credit insurance; prohibiting the financing of points and fees in excess of 6% of the total loan; limiting the size and interval of balloon payments; and limiting prepayment penalties that could be charged to consumers. These regulations also require the lender to make certain disclosures to borrowers who are seeking high cost mortgages. The regulations apply to all state licensed financial institutions making residential loans in Illinois. The regulations also require lenders to file with the Commissioner of Illinois semi-annual reports on mortgage loans, including information relating to defaults and foreclosures.
Inasmuch as neither the Company nor the Bank indulges in such practices, it is unlikely that any legislation adopted in Illinois to combat this perceived problem would have an impact on either the Company or the Bank other than the creation of additional reporting requirements.
The Subsidiary Bank is subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which restrict financial transactions between banks and affiliated companies. The statute limits credit transactions between a bank and its executive officers and its affiliates, prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank’s extension of credit to an affiliate.
Bank Holding Company Act of 1956, As Amended (the “Act”)
A bank holding company is subject to regulation under the Act and is registered with the Federal Reserve Board under the Act. A bank holding company is required by the Act to file an annual report of its operations and such additional information as the Federal Reserve Board may require and is subject, along with its subsidiaries, to examination by the Federal Reserve Board. The Federal Reserve Board has jurisdiction to regulate the terms of certain debt issues of bank holding companies including the authority to impose reserve requirements.
The Act currently prohibits a bank holding company, or any subsidiary thereof, other than the bank, from acquiring all or substantially all the assets of any bank located outside of Illinois or for a bank holding company or any subsidiary from acquiring 5% or more of the voting shares of any bank located outside of Illinois unless such acquisition is specifically authorized by the laws of the state in which the bank is located and the acquirer receives prior approval from the Federal Reserve Board. The acquisition of 5% or more of the voting shares of any bank located in Illinois requires the prior approval of the Federal Reserve Board and is subject to state law limitations.
The Act also prohibits, with certain exceptions, a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks, or furnishing services to banks and their subsidiaries, except that bank holding companies may engage in, and may own shares of, companies engaged in businesses found by the Federal Reserve Board to be “so closely related to banking…as to be a proper incident thereto.” Under current regulations of the Federal Reserve Board, a bank holding company and its nonbank subsidiaries are permitted, among other activities, to engage in such banking-related business ventures as sales and consumer finance, equipment leasing, computer service bureau and software operations, mortgage banking and brokerage, and sale and leaseback and other forms of real estate banking. The Act does not place territorial restrictions on the activities of a bank holding company or its nonbank subsidiaries.
Federal law prohibits acquisition of “control” of a bank or bank holding company without prior notice to certain federal bank regulators. “Control” is defined in certain cases as the acquisition of as little as 10% of the outstanding shares. Furthermore, under certain circumstances, a bank holding company may not be able to purchase its own stock where the gross consideration will equal 10% or more of the company’s net worth without obtaining approval of the Federal Reserve Board.
Graham-Leach-Bliley Act of 1999
The enactment of the Graham-Leach-Bliley Act of 1999 (the “GLB Act”) swept away large parts of a regulatory framework that had its origins in the Depression Era of the 1930s. Effective March 11, 2000, new opportunities became available for banks, other depository institutions, insurance companies and securities firms to enter into combinations
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that permit a single financial services organization to offer customers a more complete array of financial products and services. To further this goal, the GLB Act amends section 4 of the Act providing a new regulatory framework for regulation through the financial holding company (“FHC”), which has as its umbrella regulator the Federal Reserve Board. Functional regulation of the FHC’s separately regulated subsidiaries will be conducted by its primary functional regulator. Pursuant to the GLB Act, bank holding companies, subsidiary depository institutions thereof and foreign banks electing to qualify as a FHC must be “well managed,” “well capitalized” and at least rated satisfactory under the Community Reinvestment Act in order for them to engage in new financial activities.
An FHC may engage in securities, insurance and other activities that are financial in nature or incidental to a financial activity. While aware of the flexibility of the FHC statute the Company has, for the time being, decided not to convert to a FHC, but will continue to follow the reception given FHCs in the marketplace. The activities of bank holding companies that are not FHCs will continue to be limited to activities under the Act.
The GLB Act also prohibits a financial institution from disclosing non-public information about a consumer to nonaffiliated third parties unless the institution satisfies various disclosure and opt out requirements and the consumer has not elected to opt out of the disclosure. Under the GLB Act, a financial institution must provide its consumers with a notice of its privacy policies and practices, and the Federal Reserve Board, the FDIC and other financial regulatory agencies are authorized to issue regulations to implement notice requirement and restrictions on a financial institution’s ability to disclose non-public personal information about consumers to nonaffiliated third parties. Because the Company and the Bank are not now engaged in selling or transferring non-public customer information to nonaffiliated third parties, it is anticipated that this burden will not result in material economic cost to the Company or the Bank.
The GLB Act provides a federal right to privacy for non-public personal information of individual customers. The Company and the Bank are also subject to certain state laws that deal with the use and distribution of non-public personal information.
The GLB Act is expected, in time, to alter the competitive landscape of the product markets presently served by the Company. Companies that are presently engaged primarily in insurance activities or securities activities will be permitted to acquire banks and bank holding companies. The Company may, in the future, face increased competition from a broader range of larger, more diversified financial companies.
USA Patriot Act
On October 26, 2001, the President signed into law comprehensive anti-terrorism legislation known as the USA Patriot Act. Title III of the USA Patriot Act requires financial institutions, including Upbancorp and the Subsidiary Bank, to help prevent, detect and prosecute international money laundering and the financing of terrorism. The Department of the Treasury has adopted additional requirements to further implement Title III.
Under these regulations, a mechanism has been established for law enforcement to communicate names of suspected terrorists and money launderers to financial institutions, in return for securing the ability to promptly locate accounts and transactions involving those suspects. Financial institutions receiving names of suspects must search their account and transaction records for potential matches and report positive results to the Treasurer’s Financial Crimes Enforcement Network (“FinCEN”). Each financial institution must designate a point of contact to receive information requests. These regulations outline how financial institutions can share information concerning suspected terrorist and money laundering activity with other financial institutions under the protection from the statutory safe harbor from liability, provided each financial institution notifies FinCEN of its intent to share information.
The Department of the Treasury has also adopted regulations intended to prevent money laundering and terrorist financing through correspondent accounts maintained by U.S. financial institutions on behalf of foreign banks. Financial institutions are required to take reasonable steps to ensure they are not providing banking services directly or indirectly to foreign shell banks.
Upbancorp and the Subsidiary Bank have augmented their systems and procedures to accomplish compliance with these requirements. Upbancorp and the Subsidiary Bank believe that the cost of compliance with Title III of the USA Patriot Act is not likely to be material to them.
FDIC Insurance Premiums
The Subsidiary Bank’s deposits are insured through the BIF which is administered by the FDIC. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the FDIC.
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The FDIC’s deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums on deposits based upon their level of capital and supervisory evaluation. For 2003, the Subsidiary Bank will pay premium assessments on its BIF insured deposits in order to service the interest on the Financing Corporation (“FICO’) bond obligations which were used to finance the cost of “thrift bailouts” in the 1980’s. The FICO assessment rates for the first semi-annual period of 2003 were set at $.0168 per $100 of insured deposits each for BIF assessable deposits. These rates may be adjusted quarterly to reflect changes in assessment basis for the BIF.
On July 30, 2002, the President signed the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). This legislation impacts corporate governance of public companies, affecting their officers and directors, their audit committees, their relationships with their accountants, and the audit function itself. Certain provisions of the Act became effective on July 30, 2002. Others will become effective as the Securities and Exchange Commission (“SEC”) adopts appropriate rules.
The Sarbanes-Oxley Act implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from corporate wrongdoing. The Sarbanes-Oxley Act’s principal legislation includes:
• the creation of an independent accounting oversight board to oversee the audit of public companies and auditors who perform such audits;
• auditor independence provisions which restrict non-audit services that independent accountants may provide to their audit clients;
• additional corporate governance and responsibility measures, including: (i) requiring the chief executive officer and chief financial officer to certify financial statements; (ii) prohibiting trading of securities by officers and directors during periods in which certain employee benefit plans are prohibited from trading; (iii) requiring chief executive officer and chief financial officer to forfeit salary and bonuses, including profits on the sale of company securities, in certain situations; and (iv) protecting whistleblowers and informants;
• expansion of the power of the audit committee, including the requirement that the audit committee: (i) have direct control of the independent auditor; (ii) be able to hire and fire the independent auditor; and (iii) approve all non-audit services,
• expanded disclosure requirements, including accelerated reporting of stock transactions by insiders and the prohibition of most loans to directors and executive officers of non-financial institutions;
• mandatory disclosure by analysts of potential conflicts of interest; and
• a range of enhanced penalties for fraud and other violations.
Governmental Monetary Policies and Economic Conditions
The earnings of the Company are affected in important respects by general economic conditions and also by the fiscal and monetary policies of the federal government and its agencies. In particular, the FRB regulates the national supply of bank credit in order to achieve, among other things, maximum employment and a stable price level. Among the instruments of monetary policy used by the FRB to implement these objectives are: open market transactions in United States government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth of bank loans, investments, and deposits, and they may also affect interest rates charged on loans or paid for deposits.
Interest rate sensitivity has a major impact on the yields earned on assets of the Subsidiary Bank. As market rates change, yields earned on assets may not necessarily move to the same degree as rates paid on liabilities. For this reason, the Subsidiary Bank attempts to minimize earnings volatility related to fluctuations in interest rates through the use of formal asset/liability management programs which identify imbalances between the repricing of earning assets and funding sources, among other things.
In addition to the policy of the FRB, the Company’s earnings are also affected by the FDIC insurance premiums and the annual fees charged by the various regulatory authorities. The Company cannot fully predict the nature or the extent of any effect which such fiscal and monetary policies may have on its business and earnings.
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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. In addition to the risk-based capital requirements, the FRB, the OCC and the FDIC require institutions to maintain a minimum leveraged-capital ratio to supplement the risk-based capital guidelines. The leverage ratio is intended to ensure that adequate capital is maintained against risks other than credit risk.
The Company and the Subsidiary Bank exceeded the minimum required capital guidelines for both risk-based capital ratios and the leverage ratio at December 31, 2002. A further discussion of the capital guidelines is included in the Capital Resources section under Item 7 of this Form 10-K.
DIVIDENDS
General
In addition to the capital guidelines provided in the discussion above, there are various national and state banking regulations which limit the ability of the Subsidiary Bank to pay dividends. This limits the ability of the Company to pay dividends. Since the Company is a legal entity, separate and distinct from its affiliates, its dividends are not subject to such bank regulatory guidelines. The holders of the Company’s common stock are entitled to receive such dividends as are declared by the Board of Directors. For a further discussion of dividends, see Note 12 “Dividend Restrictions and Regulatory Capital Requirements” in the Notes to Consolidated Financial Statements included under Item 8 of this Form 10-K.
National Banking Association Restrictions
Uptown is a national banking association and is limited with respect to the amount of dividends which it can pay to its shareholders under Sections 56 and 60 of the National Bank Act.
Section 56 restricts a national bank from paying dividends if it would impair the institution’s capital by barring any payments in excess of “net profits then on hand.” Section 56 further requires that a bank deduct losses and bad debts from “net profits then on hand.” It also specifies a portion of a bank’s capital surplus account may be included as “net profits then on hand” to the extent 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.
COMPETITION
The principal methods of competition between commercial banks is generally expressed in terms of price, including interest rates paid on deposits and interest rates charged on borrowings, fees charged on fiduciary services, quality of services to customers, ease of access to services, and the offering of additional services. More recently, technological advances such as internet banking, PC banking, telebanking, point-of-sale debit cards and electronic data interchange have also resulted in intensified competition with traditional banking distribution systems.
Both Illinois and Arizona are highly competitive markets for banking and related financial services. Since these areas are the Company’s primary focus markets, the Subsidiary Bank is exposed to varying types and levels of competition. In general, the Subsidiary Bank competes, anticipates and responds within each individual market area. Both Uptown and Heritage compete and rely heavily on the high level of quality service provided to our customers. The Company has seen the level of competition and number of competitors in its market places increase in recent years and expects a continuation of these competitive market conditions.
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The following table summarizes the Company and Subsidiary Bank’s properties by location:
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Ownership |
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Square Footage |
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The Company |
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4753 N. Broadway |
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Chicago, Illinois |
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Uptown |
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Main Office (Illinois): |
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Banking Office: |
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4753 N. Broadway |
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Owned |
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149,000 |
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(Note 1) |
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Chicago, Illinois |
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Banking Office: |
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6041 N. Clark Street |
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Owned |
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2,100 |
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(Note 1) |
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Chicago, Illinois |
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Banking Office: |
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5345 N. Sheridan Road |
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Leased |
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1,500 |
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Chicago, Illinois |
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Banking Office: |
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1058 W. Bryn Mawr Avenue |
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Leased |
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1,500 |
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Chicago, Illinois |
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Aircraft Lending Office: |
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43 W 518 Route 30 |
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Leased |
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1,800 |
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Aurora Municipal Airport |
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Sugar Grove, Illinois |
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Banking Office: |
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4553-57 N. Lincoln Avenue |
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Leased |
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1,870 |
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Chicago, Illinois |
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Main Office (Arizona): |
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4222 E. Camelback Road |
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Leased |
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4,100 |
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Suite J200 |
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Phoenix, Arizona |
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Banking Office: |
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4222 E. Camelback Road |
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Leased |
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4,100 |
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Suite J100 |
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Phoenix, Arizona |
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Banking Office: |
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1333 W. Broadway |
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Leased |
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4,700 |
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Tempe, Arizona |
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In addition to the banking locations listed above, the Subsidiary Bank owns 9 automatic teller machines, strategically located within the Subsidiary’s market places.
At December 31, 2002, the properties and equipment of the Company had an aggregate net book value of approximately $5.0 million.
Note 1: These locations are owned by Uptown’s wholly-owned subsidiary, BCBC. Uptown utilizes approximately 49,000 square feet for its main office and the rest of the facility is leased out by BCBC to independent third parties.
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ITEM 3: LEGAL PROCEEDINGS
Neither the Company nor its Subsidiary Bank are party to any litigation, which in the judgment of management after consultation with counsel, would have a material effect on the financial position or results of operations of the Company or the Subsidiary Bank.
There were no items submitted to a vote of security holders during the fourth quarter of 2002.
The Company’s common stock is traded on the Over-The-Counter market under the symbol UPBN. As of December 31, 2002, there were 267 shareholders of record. The following table sets forth common stock information during each quarter of 2002 and 2001.
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2002 |
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2001 |
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First |
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Fourth |
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Third |
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Second |
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First |
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Market Price of Common Stock: |
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|
|
|
|
|
|
|
|
|
|
|
||||||||
|
High |
|
$ |
44.00 |
|
$ |
43.25 |
|
$ |
46.00 |
|
$ |
49.00 |
|
$ |
32.00 |
|
$ |
33.00 |
|
$ |
32.50 |
|
$ |
33.00 |
|
|
Low |
|
38.10 |
|
40.60 |
|
42.50 |
|
35.25 |
|
32.00 |
|
29.60 |
|
31.75 |
|
29.81 |
|
||||||||
|
Quarter-End |
|
41.10 |
|
41.00 |
|
44.00 |
|
45.00 |
|
32.00 |
|
31.00 |
|
31.80 |
|
32.50 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Cash Dividends per Share |
|
0.13 |
|
0.13 |
|
0.13 |
|
0.13 |
|
0.13 |
|
0.13 |
|
0.13 |
|
0.13 |
|
||||||||
A discussion regarding the regulatory restrictions applicable to the Subsidiary Bank’s ability to pay dividends is included in the Dividends section under Item 1 of this Form 10-K and Note 12 “Dividend Restrictions and Regulatory Capital Requirements” in the Notes to Consolidated Financial Statements included under Item 8 of this Form 10-K.
10
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 under Item 8 of 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, 2002, is presented in the following table.
Selected Financial Data
|
|
|
Years Ended December 31, |
|
|||||||||||||
|
(Dollars in thousands, except per share data) |
|
2002 |
|
2001 |
|
2000 |
|
1999 |
|
1998 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Operating Results: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Interest income |
|
$ |
27,741 |
|
$ |
30,985 |
|
$ |
30,090 |
|
$ |
23,530 |
|
$ |
20,040 |
|
|
Interest expense |
|
7,411 |
|
13,373 |
|
13,105 |
|
8,547 |
|
7,109 |
|
|||||
|
Net interest income |
|
20,330 |
|
17,612 |
|
16,985 |
|
14,983 |
|
12,931 |
|
|||||
|
Provision for loan losses |
|
1,700 |
|
890 |
|
695 |
|
885 |
|
580 |
|
|||||
|
Other income |
|
1,865 |
|
2,611 |
|
2,285 |
|
3,213 |
|
3,154 |
|
|||||
|
Other expense |
|
14,147 |
|
13,935 |
|
13,943 |
|
13,349 |
|
11,940 |
|
|||||
|
Income before income taxes |
|
6,348 |
|
5,398 |
|
4,632 |
|
3,962 |
|
3,565 |
|
|||||
|
Income taxes |
|
2,176 |
|
1,915 |
|
1,611 |
|
1,385 |
|
1,265 |
|
|||||
|
Net income |
|
$ |
4,172 |
|
$ |
3,483 |
|
$ |
3,021 |
|
$ |
2,577 |
|
$ |
2,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net income |
|
$ |
5.00 |
|
$ |
4.17 |
|
$ |
3.61 |
|
$ |
3.00 |
|
$ |
2.63 |
|
|
Cash dividends declared |
|
0.52 |
|
0.52 |
|
0.52 |
|
0.52 |
|
0.50 |
|
|||||
|
Dividend payout ratio |
|
10.40 |
% |
12.47 |
% |
14.40 |
% |
17.33 |
% |
19.10 |
% |
|||||
|
Book value |
|
40.34 |
|
35.15 |
|
31.01 |
|
26.90 |
|
26.02 |
|
|||||
|
Market price |
|
41.10 |
|
32.00 |
|
29.75 |
|
33.00 |
|
35.25 |
|
|||||
|
Weighted average shares |
|
835,055 |
|
835,055 |
|
836,478 |
|
859,710 |
|
875,907 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance Sheet Highlights: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Assets |
|
$ |
407,120 |
|
$ |
389,453 |
|
$ |
396,671 |
|
$ |
324,777 |
|
$ |
269,462 |
|
|
Loans, net of deferred loan fees |
|
285,713 |
|
303,728 |
|
292,305 |
|
249,719 |
|
195,095 |
|
|||||
|
Deposits |
|
344,665 |
|
324,025 |
|
348,548 |
|
270,155 |
|
226,034 |
|
|||||
|
Shareholders’ equity |
|
33,682 |
|
29,356 |
|
25,897 |
|
22,524 |
|
22,638 |
|
|||||
|
Average equity to average asset ratio |
|
8.02 |
% |
6.42 |
% |
6.54 |
% |
7.77 |
% |
8.69 |
% |
|||||
|
Asset growth rate |
|
4.54 |
% |
-1.82 |
% |
22.14 |
% |
20.53 |
% |
16.46 |
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Performance Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Return on average assets |
|
1.06 |
% |
0.87 |
% |
0.84 |
% |
0.87 |
% |
0.91 |
% |
|||||
|
Return on average shareholders’ equity |
|
13.19 |
% |
13.49 |
% |
12.77 |
% |
11.22 |
% |
10.44 |
% |
|||||
|
Net interest margin (1) |
|
4.94 |
% |
3.88 |
% |
4.16 |
% |
4.73 |
% |
4.74 |
% |
|||||
|
Percentage nonperforming loans/ |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
total loans |
|
2.47 |
% |
1.68 |
% |
0.59 |
% |
0.36 |
% |
0.67 |
% |
|||||
|
Percentage nonperforming assets/ |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
total assets |
|
1.93 |
% |
1.31 |
% |
0.43 |
% |
0.28 |
% |
0.49 |
% |
|||||
(1) Interest income and yields on non-taxable securities are reflected on a tax equivalent basis based upon a Federal income tax rate of 35%.
11
(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 2002 totaled $4,172 or $5.00 per share. This is compared to net income and earnings per share of $3,483 or $4.17 per share and $3,021 or $3.61 per share for 2001 and 2000, respectively. The results of 2002 represent a 19.78% improvement in net income from 2001 after a 15.29% increase in 2001 over 2000. The earnings improvement in 2002 is mostly attributable to increased net interest income while the 2001 improvement was attributable to increased net interest income and gain on the sale of investments.
The Company’s return on average shareholders’ equity for 2002 was 13.19% as compared to 13.49% in 2001 and 12.77% in 2000. Return on average assets for 2002 was 1.06% as compared to .87% in 2001 and .84% in 2000. The increase in the Company’s return on average assets from 2001 to 2002 is primarily the result of increased net interest income. The single largest factor in the increase in net interest income was the roll-off/maturity of time deposits that carried a significantly higher rate at issue in 2001 than is currently available for such deposits. The slight increase from 2000 to 2001 is the result of an increase in other income, primarily due to the gain on the sale of investments and increased net interest income.
The Company’s increase in its asset growth rate is primarily the result of an increase in the bank’s total deposits, the majority which are reflected in federal funds sold balances. Total loans decreased 5.93% in the current year. This slight decrease in total loans was primarily the result of the bank’s sale of aircraft related loans totaling over $10 million throughout the year.
Nonperforming loans increased as a percentage of outstanding loans during the past year. Nonperforming loans totaled $7,060 or 2.47% of total loans at December 31, 2002, as compared to $5,091 or 1.68% and $1,721 or .59% of total loans at December 31, 2001 and 2000, respectively. The majority of this balance relates to ten loans, totaling $6,255, to three borrowers being placed or remaining on nonaccrual status during the past year. These loans have been analyzed and included in the Bank’s measurement process when reviewing the allowance for loan losses as performed on a quarterly or more frequent basis. Subsequent to December 31, 2002, two of these loans in the amount of $2,508 paid off in full, thereby reducing nonperforming loan balances from $7,060 to $4,552.
The Company made a $425 contribution to the Pension Plan on December 31, 2002, to cure the estimated unfunded accumulated benefit obligation as determined by the actuaries to avoid a reduction in equity at the end of 2002.
On February 14, 2003, Upbancorp, Inc., and Bridgeview Bancorp, Inc. (“Bridgeview”), and Bridgeview Acquisition Corp., a wholly owned subsidiary of Bridgeview (“MergerSub”), entered into an Agreement and Plan of Merger, pursuant to which MergerSub will be merged with and into Upbancorp. As a result of the merger, shareholders will receive approximately $67.90 in exchange for each share of common stock.
The merger is subject to approval by the shareholders of Upbancorp who own at least a majority of the issued and outstanding common stock of Upbancorp, receipt of certain regulatory approvals and other customary conditions set forth in the Agreement and Plan of Merger.
Pursuant to the Agreement and Plan of Merger, upon consummation of the merger, the certificate of incorporation of MergerSub shall be the certificate of incorporation of the surviving corporation, and the bylaws of MergerSub shall be the bylaws of the surviving corporation, until each is amended in accordance with law. The directors and officers of MergerSub will be the directors and officers of the surviving corporation.
12
The Agreement and Plan of Merger may be terminated by either Bridgeview or Upbancorp if the merger has not been consummated by August 1, 2003, provided the party seeking to terminate the Agreement and Plan of Merger is not then in material breach of the Agreement and Plan of Merger.
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 92% of the Company’s net revenues (net interest income/net interest income plus non-interest income) in 2002. A detailed analysis highlighting the changes in net interest income is provided in Table 1 and 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 35%, resulting in a fully taxable equivalent (“FTE”) net interest income.
Net interest income on a fully taxable equivalent basis totaled $20,620 in 2002 compared to $17,827 in 2001 and $17,248 in 2000. The higher net interest income in 2002 includes an increase of $584 due to volume fluctuations following an increase due to volume of $1,470 in 2001. Rate movements positively impacted net interest income by $2,743 after negatively impacting net interest income by $839 in 2001.
The 2002 improvement in net interest income was primarily fueled by a significant decrease in average other time deposits. Other average time deposits decreased $16,703 resulting in a positive net interest income impact of $967. Average interest earning assets decreased by $5,116 or 1.36% and average earning liabilities decreased $18,277 or 6.00%. The majority of the volume decrease was the result of the decrease in other time deposits being replaced in the current year by lower cost core deposits (see Table 7 for a definition of core deposits).
Net interest yield represents net interest income as a percentage of total interest earning assets. The Company manages net interest income through investment decisions on interest earning assets and monitoring interest rates its banking subsidiary offers, particularly rates for time deposits and short-term borrowings. The Company’s net interest margin measured on a fully taxable equivalent basis increased to 5.54% in 2002 from 4.73% in 2001 and 5.07% in 2000.
13
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
|
|
|
2002 |
|
2001 |
|
2000 |
|
||||||||||||||||||
|
|
|
Average |
|
Interest |
|
Yield/ |
|
Average |
|
Interest |
|
Yield/ |
|
Average |
|
Interest |
|
Yield/ |
|
||||||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Taxable |
|
$ |
46,156 |
|
$ |
3,035 |
|
6.58 |
% |
$ |
55,087 |
|
$ |
3,501 |
|
6.36 |
% |
$ |
43,718 |
|
$ |
2,769 |
|
6.33 |
% |
|
Nontaxable (1) |
|
10,598 |
|
820 |
|
7.74 |
% |
7,605 |
|
591 |
|
7.77 |
% |
7,647 |
|
651 |
|
8.51 |
% |
||||||
|
Nonmarketable Equity Securities |
|
1,864 |
|
102 |
|
5.47 |
% |
1,880 |
|
116 |
|
6.17 |
% |
1,578 |
|
114 |
|
7.22 |
% |
||||||
|
Federal funds sold |
|
11,490 |
|
166 |
|
1.44 |
% |
8,334 |
|
364 |
|
4.37 |
% |
9,585 |
|
621 |
|
6.48 |
% |
||||||
|
Mortgages held-for-sale |
|
289 |
|
19 |
|
6.57 |
% |
561 |
|
44 |
|
7.84 |
% |
— |
|
— |
|
0.00 |
% |
||||||
|
Loans, net of deferred loan fees (2)(3) |
|
301,721 |
|
23,889 |
|
7.92 |
% |
303,767 |
|
26,584 |
|
8.75 |
% |
277,482 |
|
26,198 |
|
9.44 |
% |
||||||
|
Total interest earning assets |
|
$ |
372,118 |
|
$ |
28,031 |
|
7.53 |
% |
$ |
377,234 |
|
$ |
31,200 |
|
8.27 |
% |
$ |
340,010 |
|
$ |
30,353 |
|
8.93 |
% |
|
Cash and due from banks |
|
14,338 |
|
|
|
|
|
17,899 |
|
|
|
|
|
13,629 |
|
|
|
|
|
||||||
|
Allowance for loan losses |
|
(4,402 |
) |
|
|
|
|
(3,809 |
) |
|
|
|
|
(3,426 |
) |
|
|
|
|
||||||
|
Other assets |
|
12,438 |
|
|
|
|
|
10,664 |
|
|
|
|
|
11,451 |
|
|
|
|
|
||||||
|
Total assets |
|
$ |
394,492 |
|
|
|
|
|
$ |
401,988 |
|
|
|
|
|
$ |
361,664 |
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Liabilities
& |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Savings, NOW and |
|
$ |
128,645 |
|
$ |
1,989 |
|
1.55 |
% |
$ |
131,562 |
|
$ |
3,626 |
|
2.76 |
% |
$ |
128,336 |
|
$ |
4,343 |
|
3.38 |
% |
|
Other time deposits |
|
128,606 |
|
4,258 |
|
3.31 |
% |
145,309 |
|
8,415 |
|
5.79 |
% |
118,644 |
|
7,058 |
|
5.95 |
% |
||||||
|
Borrowed funds and note payable |
|
29,089 |
|
1,164 |
|
4.00 |
% |
27,746 |
|
1,332 |
|
4.80 |
% |
27,715 |
|
1,704 |
|
6.15 |
% |
||||||
|
Total interest bearing liabilities |
|
$ |
286,340 |
|
$ |
7,411 |
|
2.59 |
% |
$ |
304,617 |
|
$ |
13,373 |
|
4.39 |
% |
$ |
274,695 |
|
$ |
13,105 |
|
4.77 |
% |
|
Demand deposits |
|
73,220 |
|
|
|
|
|
66,710 |
|
|
|
|
|
58,823 |
|
|
|
|
|
||||||
|
Other liabilities |
|
3,301 |
|
|
|
|
|
4,835 |
|
|
|
|
|
4,482 |
|
|
|
|
|
||||||
|
Shareholders’ equity |
|
31,631 |
|
|
|
|
|
25,826 |
|
|
|
|
|
23,664 |
|
|
|
|
|
||||||
|
Total liabilities and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
shareholders’ equity |
|
$ |
394,492 |
|
|
|
|
|
$ |
401,988 |
|
|
|
|
|
$ |
361,664 |
|
|
|
|
|
|||
|
Net interest income/margin |
|
|
|
$ |
20,620 |
|
4.94 |
% |
|
|
$ |
17,827 |
|
3.88 |
% |
|
|
$ |
17,248 |
|
4.16 |
% |
|||
|
Net interest income/earning assets |
|
|
|
|
|
5.54 |
% |
|
|
|
|
4.73 |
% |
|
|
|
|
5.07 |
% |
||||||
(1) Interest income and yields on nontaxable securities are reflected on a tax equivalent basis based upon a Federal income tax rate of 35% for 2002, 2001 and 2000.
(2) The allowance for loan losses is not included as part of this analysis.
(3) Loan fees included in the above interest income computations total $2,089, $1,493 and $1,459 for the years ended December 31, 2002, 2001 and 2000, respectively. At December 31, 2002, 2001 and 2000, deferred loan and commitment fee income, net of direct loan origination costs, totaled $528, $536 and $498, respectively.
14
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
|
2002 Compared to 2001 |
|
Interest Income/Expense |
|
Increase/(Decrease) due to: |
|
||||||||||||||
|
|
|
2002 |
|
2001 |
|
Increase |
|
Volume |
|
Rate |
|
Volume/ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Taxable |
|
$ |
3,035 |
|
$ |
3,501 |
|
$ |
(466 |
) |
$ |
(568 |
) |
$ |
121 |
|
$ |
(19 |
) |
|
Nontaxable (1) |
|
820 |
|
591 |
|
229 |
|
233 |
|
(3 |
) |
(1 |
) |
||||||
|
Nonmarketable Equity Securities |
|
102 |
|
116 |
|
(14 |
) |
(1 |
) |
(13 |
) |
— |
|
||||||
|
Federal funds sold |
|
166 |
|
364 |
|
(198 |
) |
138 |
|
(244 |
) |
(92 |
) |
||||||
|
Mortgages held-for-sale |
|
19 |
|
44 |
|
(25 |
) |
4 |
|
(26 |
) |
(3 |
) |
||||||
|
Loans, net of deferred loan fees |
|
23,889 |
|
26,584 |
|
(2,695 |
) |
(205 |
) |
(2,510 |
) |
20 |
|
||||||
|
Total interest income (1) |
|
28,031 |
|
31,200 |
|
(3,169 |
) |
(399 |
) |
(2,675 |
) |
(95 |
) |
||||||
|
Savings, NOW and money market deposits |
|
1,989 |
|
3,626 |
|
(1,637 |
) |
(80 |
) |
(1,592 |
) |
35 |
|
||||||
|
Other time deposits |
|
4,258 |
|
8,415 |
|
(4,157 |
) |
(967 |
) |
(3,604 |
) |
414 |
|
||||||
|
Borrowed funds |
|
1,164 |
|
1,332 |
|
(168 |
) |
64 |
|
(222 |
) |
(10 |
) |
||||||
|
Total interest expense |
|
7,411 |
|
13,373 |
|
(5,962 |
) |
(983 |
) |
(5,418 |
) |
439 |
|
||||||
|
Net interest income |
|
$ |
20,620 |
|
$ |
17,827 |
|
$ |
2,793 |
|
$ |
584 |
|
$ |
2,743 |
|
$ |
(534 |
) |
|
2001 Compared to 2000 |
|
Interest Income/Expense : |
|
Increase/(Decrease) due to: |
|
||||||||||||||
|
|
|
2001 |
|
2000 |
|
Increase |
|
Volume |
|
Rate |
|
Volume/ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Taxable |
|
$ |
3,501 |
|
$ |
2,769 |
|
$ |
732 |
|
$ |
720 |
|
$ |
9 |
|
$ |
3 |
|
|
Nontaxable (1) |
|
591 |
|
651 |
|
(60 |
) |
(3 |
) |
(57 |
) |
— |
|
||||||
|
Nonmarketable Equity Securities |
|
116 |
|
114 |
|
2 |
|
22 |
|
(17 |
) |
(3 |
) |
||||||
|
Federal funds sold |
|
364 |
|
621 |
|
(257 |
) |
(81 |
) |
(202 |
) |
26 |
|
||||||
|
Mortgages held-for-sale |
|
44 |
|
— |
|
44 |
|
— |
|
— |
|
44 |
|
||||||
|
Loans, net of deferred loan fees |
|
26,584 |
|
26,198 |
|
386 |
|
2,509 |
|
(1,938 |
) |
(185 |
) |
||||||
|
Total interest income (1) |
|
31,200 |
|
30,353 |
|
847 |
|
3,167 |
|
(2,205 |
) |
(115 |
) |
||||||
|
Savings, NOW and money market deposits |
|
3,626 |
|
4,343 |
|
(717 |
) |
109 |
|
(806 |
) |
(20 |
) |
||||||
|
Other time deposits |
|
8,415 |
|
7,058 |
|
1,357 |
|
1,586 |
|
(187 |
) |
(42 |
) |
||||||
|
Borrowed funds |
|
1,332 |
|
1,704 |
|
(372 |
) |
2 |
|
(373 |
) |
(1 |
) |
||||||
|
Total interest expense |
|
13,373 |
|
13,105 |
|
268 |
|
1,697 |
|
(1,366 |
) |
(63 |
) |
||||||
|
Net interest income |
|
$ |
17,827 |
|
$ |
17,248 |
|
$ |
579 |
|
$ |
1,470 |
|
$ |
(839 |
) |
$ |
(52 |
) |
(1) Interest income and yields on nontaxable securities are reflected on a tax equivalent basis based upon a Federal income tax rate of 35% for 2002, 2001 and 2000.
Funds Management Analysis and Interest Rate Sensitivity
The earning asset portfolio of the Subsidiary Bank is typically the leading determinate of performance. This is because the largest percentage of total income is attributable to net interest income. The policies and practices for managing liquidity risk and interest rate risk are set by the Subsidiary Bank’s Funds Management Committee (“FMC”) whose goal is to ensure maximum returns within safe and sound risk parameters. The FMC monitors exposure in view of market developments and the Subsidiary Bank’s financial condition, sets guidance for interest rate risk management decisions, ensures consistency in the measurement of risk and monitors liquidity and capital adequacy. In this capacity, the FMC places limits on the level of investments in various assets and off-balance sheet instruments, as well as on the funding levels for loans and deposits. In addition, the FMC establishes pricing policies for the Subsidiary Bank’s products and services.
15
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, 2002, 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 |
|
3-12 |
|
1-3 |
|
3-5 |
|
Greater
than |
|
Total |
|
||||||
|
Rate Sensitive Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Federal funds sold |
|
$ |
40,500 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
40,500 |
|
|
Investment securities - Debt |
|
— |
|
1,012 |
|
7,359 |
|
5,070 |
|
42,862 |
|
56,303 |
|
||||||
|
Investment securities - Equity |
|
— |
|
— |
|
— |
|
— |
|
1,520 |
|
1,520 |
|
||||||
|
Loans (1) |
|
76,717 |
|
43,070 |
|
63,892 |
|
80,779 |
|
14,723 |
|
279,181 |
|
||||||
|
Total Rate Sensitive Assets |
|
117,217 |
|
44,082 |
|
71,251 |
|
85,849 |
|
59,105 |
|
377,504 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Rate Sensitive Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Savings, NOW, and money market deposits |
|
61,155 |
|
61,320 |
|
79,612 |
|
13,041 |
|
— |
|
215,128 |
|
||||||
|
Other time deposits |
|
43,327 |
|
73,747 |
|
10,593 |
|
1,870 |
|
— |
|
129,537 |
|
||||||
|
Borrowed funds & note payable |
|
20,994 |
|
— |
|
4,500 |
|
— |
|
— |
|
25,494 |
|
||||||
|
Total Rate Sensitive Liabilities |
|
125,476 |
|
135,067 |
|
94,705 |
|
14,911 |
|
— |
|
370,159 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Interest Sensitivity GAP: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Incremental |
|
$ |
(8,259 |
) |
$ |
(90,985 |
) |
$ |
(23,454 |
) |
$ |
70,938 |
|
$ |
59,105 |
|
$ |
7,345 |
|
|
Cumulative |
|
$ |
(8,259 |
) |
$ |
(99,244 |
) |
$ |
(122,698 |
) |
$ |
(51,760 |
) |
$ |
7,345 |
|
|
|
|
|
Cumulative Interest Sensitive GAP as a percentage of total earning assets |
|
-2.19 |
% |
-26.29 |
% |
-32.50 |
% |
-13.71 |
% |
1.95 |
% |
|
|
||||||
(1) Deferred loan fees, allowance for loan losses and nonaccrual loans are not included as a part of this analysis.
16
Table 3 shows the under-one-year net liability position at December 31, 2002 was $(99,244) (26.29% of total earning assets) compared to the under-one-year net liability position at December 31, 2001 of $(131,629) (36.45% of total earning assets). A significant under-one-year net liability position would indicate 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. Currently, the Company is focusing on a variety of methods to better match its under-one-year repricing mix. Upbancorp and Uptown 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 net interest income will not be materially affected in periods of rising or falling interest rates.
The following table shows the Company’s available-for-sale investment securities’ maturity distribution and corresponding tax-equivalent yields at December 31, 2002:
Table 4
Securities Available-for-Sale
Maturity Distribution and Portfolio Yields
|
|
|
One year |
|
One year |
|
Five years |
|
After |
|
||||||||||||
|
|
|
Amortized |
|
Yield |
|
Amortized |
|
Yield |
|
Amortized |
|
Yield |
|
Amortized |
|
Yield |
|
||||
|
U.S. Government agencies |
|
$ |
1,000 |
|
6.52 |
% |
$ |
11,150 |
|
6.19 |
% |
$ |
5,102 |
|
3.32 |
% |
$ |
25,902 |
|
6.27 |
% |
|
States and political subdivisions |
|
— |
|
— |
|
825 |
|
6.91 |
% |
2,306 |
|
7.56 |
% |
8,443 |
|
7.72 |
% |
||||
|
Total |
|
$ |
1,000 |
|
6.52 |
% |
$ |
11,975 |
|
6.24 |
% |
$ |
7,408 |
|
4.64 |
% |
$ |
34,345 |
|
6.63 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Mortgage-backed securities |
|
$ |
64 |
|
7.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Equity securities |
|
1,500 |
|
8.01 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loan Portfolio
The following table shows the major classifications of loans at December 31:
Table 5
Loan Portfolio
|
|
|
2002 |
|
2001 |
|
2000 |
|
1999 |
|
1998 |
|
|||||
|
Commercial - Aircraft related |
|
$ |
32,683 |
|
$ |
45,726 |
|
$ |
54,614 |
|
$ |
53,531 |
|
$ |
26,617 |
|
|
Commercial - Other |
|
47,365 |
|
56,453 |
|
58,404 |
|
42,320 |
|
33,395 |
|
|||||
|
Real estate - Construction |
|
70,515 |
|
65,821 |
|
52,637 |
|
35,686 |
|
22,365 |
|
|||||
|
Real estate - Residential (1 to 4 family) |
|
25,882 |
|
33,998 |
|
32,431 |
|
30,147 |
|
30,971 |
|
|||||
|
Real estate - Residential (5 or more) |
|
36,255 |
|
37,522 |
|
30,264 |
|
27,514 |
|
29,900 |
|
|||||
|
Real estate - Non-Residential |
|
71,131 |
|
61,798 |
|
58,467 |
|
55,352 |
|
45,640 |
|
|||||
|
Consumer and all other |
|
2,410 |
|
2,946 |
|
5,986 |
|
5,607 |
|
6,442 |
|
|||||
|
Deferred loan fees |
|
(528 |
) |
(536 |
) |
(498 |
) |
(438 |
) |
(235 |
) |
|||||
|
Total loans |
|
285,713 |
|
303,728 |
|
292,305 |
|
249,719 |
|
195,095 |
|
|||||
|
Less allowance for loan losses |
|
(4,710 |
) |
(4,098 |
) |
(3,817 |
) |
(3,114 |
) |
(2,499 |
) |
|||||
|
Total loans, net of allowance for loan losses |
|
$ |
281,003 |
|
$ |
299,630 |
|
$ |
288,488 |
|
$ |
246,605 |
|
$ |
192,596 |
|
17
The commercial loan maturities and sensitivity to changes in interest rates at December 31, 2002, are shown in the following table:
Table 6
Commercial Loan Maturities and Sensitivities to Changes in Interest Rates
|
|
|
In one
year |
|
After one |
|
Over |
|
Total |
|
||||
|
At December 31, 2002 |
|
|
|
|
|
|
|
|
|
||||
|
Maturities: |
|
|
|
|
|
|
|
|
|
||||
|
Commercial loans |
|
$ |
29,532 |
|
$ |
48,020 |
|
$ |
2,496 |
|
$ |
80,048 |
|
|
Secured by real estate - Construction |
|
45,143 |
|
25,340 |
|
32 |
|
70,515 |
|
||||
|
Secured by real estate - Non-residential |
|
31,049 |
|
31,841 |
|
8,241 |
|
71,131 |
|
||||
|
Total |
|
$ |
105,724 |
|
$ |
105,201 |
|
$ |
10,769 |
|
$ |
221,694 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Interest rate sensitivity: |
|
|
|
|
|
|
|
|
|
||||
|
Fixed rate |
|
$ |
58,458 |
|
$ |
96,479 |
|
$ |
10,769 |
|
$ |
165,706 |
|
|
Variable rate |
|
47,266 |
|
8,722 |
|
— |
|
55,988 |
|
||||
|
Total |
|
$ |
105,724 |
|
$ |
105,201 |
|
$ |
10,769 |
|
$ |
221,694 |
|
Liquidity Management
A key element of the FMC process is the management of liquidity. Liquid funds are needed by the Subsidiary Bank to meet the needs of its depositors, borrowers and for regulatory requirements. Liquid funds, however, generally have very low earnings potential and thus careful control of the Subsidiary Bank’s liquidity position is needed. Monitoring of this liquidity position is done daily to ensure constant adequacy and to maintain optimal levels of liquidity on the balance sheet. Another source of liquidity is off balance sheet, in the form of pre-approved loan commitments from the Federal Home Loan Bank and various correspondent banks. For a further review of the Company’s sources and uses of funds, see the Consolidated Statements of Cash Flows found in Item 8 of this Form 10-K.
The Company’s cash flows are composed of three classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Net cash provided by operating activities, consisting primarily of earnings, was $5,454 for the year ended December 31, 2002 and $2,228 for the year ended December 31, 2001. Net cash provided by and (used in) investing activities, consisting primarily of loan and investment funding was $(19,752) and $6,616 for the years ended December 31, 2002 and 2001, respectively. A significant portion of the fluctuations in cash provided by (used in) investing activities was the increase in federal funds balances partially offset by the reduction in loans during the year. Net cash provided by and (used in) financing activities, consisting of deposit fluctuations and increased borrowed funds and note payable, was $13,320 and $(10,427) for the years ended December 31, 2002 and 2001, respectively.
The Company requires adequate liquidity to pay its expenses and pay shareholder dividends. Liquidity is provided to the Company from the Subsidiary Bank in the form of dividends. Other liquidity is provided by cash balances in banks, maturing investments and interest on investments. For a discussion of dividend payments, please see Note 12 in the Notes to Consolidated Financial Statements found in Item 8 of this Form 10-K. One method of analyzing the Company’s liquidity position is through a careful review of available funding sources. The following table provides information as it pertains to funding sources and reflects a year-to-year comparison of the sources of the Company’s liability funding based upon year-end balances.
Table 7
Funding Sources - Year-end Balances
|
|
|
2002 |
|
2001 |
|
2000 |
|
|||
|
Demand deposits, noninterest-bearing |
|
$ |
89,200 |
|
$ |
72,472 |
|
$ |
65,900 |
|
|
Savings, NOW & money market deposits |
|
125,928 |
|
130,309 |
|
133,345 |
|
|||
|
Other time deposits of $100 or less |
|
66,572 |
|
73,169 |
|
98,199 |
|
|||
|
Core deposits |
|
281,700 |
|
275,950 |
|
297,444 |
|
|||
|
Other time deposits of $100 or more |
|
62,965 |
|
48,075 |
|
51,104 |
|
|||
|
Borrowed funds and note payable |
|
25,494 |
|
32,380 |
|
17,849 |
|
|||
|
Total funding sources |
|
$ |
370,159 |
|
$ |
356,405 |
|
$ |
366,397 |
|
18
Total funding sources increased 3.86% at December 31, 2002 from prior year levels. Core deposits increased 2.08% from December 31, 2001 balances while other time deposits $100 or more increased at a 30.97% rate. A recap of other time deposits $100 and more is presented in the following table. For a review of total other time deposit maturities, see Note 6 in the Notes to Consolidated Financial Statements found in Item 8 of this Form 10-K. A recap of borrowed funds and notes payable can be found in Note 7 in the Notes to Consolidated Financial Statements found in Item 8 of this Form 10-K.
Table 8
Remaining Maturity of Other Time Deposits - $100,000 and More
|
Three months or less |
|
$ |
21,886 |
|
|
Over 3 through 6 months |
|
19,698 |
|
|
|
Over 6 through 12 months |
|
17,791 |
|
|
|
Over 12 months |
|
3,590 |
|
|
|
|
|
$ |
62,965 |
|
Borrowing facilities are available to the Subsidiary Bank through various correspondent banks in the amount of $29,000. These lines are established for the purpose of borrowing on an overnight basis in the form of Federal Funds.
The Company has a $10 million line of credit, a secured revolving note payable, with a correspondent bank at December 31, 2002. This note had an outstanding balance of $3 million. Interest is calculated on the basis of 3-month LIBOR plus 150 basis points (2.90% at December 31, 2002) with interest due and payable quarterly. The expiration date of the line is March 1, 2003. The note also contains certain covenants which limit changes in capital structure, the purchase of or merger with other banks and/or businesses, and the guarantees of other liabilities and obligations. In addition, the Company must meet certain financial ratios. Subsequent to December 31, 2002, the note payable was renewed under the same terms and conditions with an expiration date of March 1, 2004.
The following table summarizes our significant contractual obligations and other potential funding needs at December 31, 2002.
|
|
|
Time |
|
Borrowed |
|
Operating |
|
Total |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
2003 |
|
$ |
118,766 |
|
$ |
3,994 |
|
$ |
315 |
|
$ |
123,075 |
|
|
2004 |
|
7,092 |
|
— |
|
198 |
|
7,290 |
|
||||
|
2005 |
|
1,808 |
|
— |
|
218 |
|
2,026 |
|
||||
|
2006 |
|
1,425 |
|
— |
|
228 |
|
1,653 |
|
||||
|
2007 |
|
446 |
|
— |
|
231 |
|
677 |
|
||||
|
Thereafter |
|
— |
|
21,500 |
|
952 |
|
22,452 |
|
||||
|
Total |
|
$ |
129,537 |
|
$ |
25,494 |
|
$ |
2,142 |
|
$ |
157,173 |
|
|
Commitments to extend credit |
|
|
|
|
|
|
|
$ |
77,753 |
|
|||
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 and that of its Subsidiary Bank in accordance with regulatory guidelines and to ensure appropriate use of this resource. The Company’s capital policy requires the Company and its Subsidiary Bank maintain a capital ratio in excess of the minimum regulatory guidelines. At December 31, 2002, both entities exceeded regulatory established minimums as defined for financial institutions. Please see Note 12 in the Notes to Consolidated Financial Statements included under Item 8 of this Form 10-K.
Total shareholders equity increased 14.74% to $33,682 at December 31, 2002. Total equity as a percentage of assets was 8.27% at the end of 2002 versus 7.54% a year earlier. Included in shareholders equity is the net unrealized gain on securities classified as available-for-sale, which amounted to $935 at the end of 2002 compared to a $347 unrealized gain at the end of 2001.
19
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 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.
We maintain our allowance for loan losses at a level management believes will be adequate to absorb probable losses on existing loans based on an evaluation of the collectibility of loans and prior loss experience. We use a risk rating system to evaluate the adequacy of the allowance for loan losses. With this system, each loan is risk rated between one and eight, by the originating loan officer or loan committee, with one being the best case and eight being a loss or the worst case. Loan loss reserve factors are multiplied against the balances in each risk-rating category to determine an appropriate level for the allowance for loan losses. Loans with risk ratings between five and eight are monitored much closer by the officers, as well as our loan committee. Control of our loan quality is continually monitored by our management and our loan committee on a monthly basis. This is also reviewed and monitored by our board of directors on a quarterly basis and is continually subjected to oversight by our board of directors through its members who serve on the loan committee. We consistently apply our methodology for determining the adequacy of the allowance for loan losses, but may make adjustments to our methodologies and assumptions based on historical information related to charge-offs and management’s evaluation of the current loan portfolio.
Uptown’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by their primary regulators, who can order the establishment of additional general or specific loss allowances, as well as external loan reviewers, who review the classifications of Uptown’s loan portfolio. The OCC, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that (i) institutions have effective systems and controls to identify, monitor and address asset quality problems; (ii) management has analyzed all significant factors that affect collectibility of the portfolio in a reasonable manner; and (iii) management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Management believes it has established an adequate allowance for loan losses. Uptown analyzes its process regularly, with modifications made if needed, and reports those results quarterly at the Company’s Board of Directors meetings. However, there can be no assurance that the regulators, in reviewing Uptown’s loan portfolio, will not request Uptown to materially increase its allowance for loan losses at the time. Although management believes adequate specific and general loan loss allowances have been established, actual losses are dependent upon future events and as such, further additions to the level of specific and general loss allowances may become necessary.
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 for non-classified credits based on including but not limited to historical loss experience, trend in delinquencies, concentration of volume, management and economic conditions and independent assessment of individual credits which have been classified by management. The unallocated portion of the allowance reflects management’s estimate of probable inherent but undetected losses within the portfolio due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower’s financial condition, the difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors. In addition, the unallocated allowance includes a component that explicitly accounts for the inherent imprecision in the allowance for loan loss calculation. At December 31, 2002, the allowance for loan losses was comprised of $4,024 and $686 of allocated and unallocated reserves, respectively.
20
Table 9
Analysis of the Allowance for Loan Losses
|
|
|
December 31, |
|
|||||||||||||
|
|
|
2002 |
|
2001 |
|
2000 |
|
1999 |
|
1998 |
|
|||||
|
Balance at beginning of year |
|
$ |
4,098 |
|
$ |
3,817 |
|
$ |
3,114 |
|
$ |
2,499 |
|
$ |
2,010 |
|
|
Loan charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Commercial - Other |
|
(887 |
) |
(514 |
) |
(8 |
) |
(263 |
) |
(130 |
) |
|||||
|
Real estate - Residential (1 to 4 family) |
|
(150 |
) |
— |
|
— |
|
(105 |
) |
— |
|
|||||
|
Real estate - Residential (5 or more) |
|
— |
|
(1 |
) |
— |
|
— |
|
— |
|
|||||
|
Real estate - Non-Residential |
|
— |
|
(55 |
) |
— |
|
— |
|
— |
|
|||||
|
Consumer and all other |
|
(126 |
) |
(40 |
) |
(2 |
) |
(25 |
) |
(25 |
) |
|||||
|
Total charge-offs |
|
(1,163 |
) |
(610 |
) |
(10 |
) |
(393 |
) |
(155 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Commercial - Other |
|
66 |
|
— |
|
11 |
|
116 |
|
64 |
|
|||||
|
Real estate - Residential (1 to 4 family) |
|
— |
|
1 |
|
3 |
|
— |
|
— |
|
|||||
|
Real estate - Residential (5 or more) |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|||||
|
Consumer and all other |
|
9 |
|
— |
|
4 |
|
7 |
|
— |
|
|||||
|
Total recoveries |
|
75 |
|
1 |
|
18 |
|
123 |
|
64 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net (charge-offs) recoveries |
|
(1,088 |
) |
(609 |
) |
8 |
|
(270 |
) |
(91 |
) |
|||||
|
Provision for loan losses |
|
1,700 |
|
890 |
|
695 |
|
885 |
|
580 |
|
|||||
|
Balance at end of year |
|
$ |
4,710 |
|
$ |
4,098 |
|
$ |
3,817 |
|
$ |
3,114 |
|
$ |
2,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
As a percent of average loans: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net loan (charge-offs) recoveries |
|
(0.36 |
)% |
(0.20 |
)% |
0.00 |
% |
(0.12 |
)% |
(0.05 |
)% |
|||||
|
Provision for loan losses |
|
0.56 |
% |
0.29 |
% |
0.25 |
% |
0.39 |
% |
0.33 |
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Allowance for loan losses as a percentage of total loans: |
|
1.65 |
% |
1.35 |
% |
1.31 |
% |
1.25 |
% |
1.28 |
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Allocation of allowance: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Commercial - Aircraft related |
|
$ |
429 |
|
$ |
483 |
|
$ |
477 |
|
$ |
588 |
|
$ |
426 |
|
|
Commercial - Other |
|
1,001 |
|
1,048 |
|
545 |
|
609 |
|
684 |
|
|||||
|
Secured by real estate |
|
2,545 |
|
2,225 |
|
1,821 |
|
621 |
|
377 |
|
|||||
|
Consumer |
|
49 |
|
23 |
|
49 |
|
51 |
|
89 |
|
|||||
|
Unallocated |
|
686 |
|
319 |
|
925 |
|
1,245 |
|
923 |
|
|||||
|
Balance at end of year |
|
$ |
4,710 |
|
$ |
4,098 |
|
$ |
3,817 |
|
$ |
3,114 |
|
$ |
2,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Loan balance as a percent of total loans: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Commercial - Aircraft related |
|
11 |
% |
15 |
% |
19 |
% |
21 |
% |
14 |
% |
|||||
|
Commercial - Other |
|
17 |
% |
19 |
% |
20 |
% |
17 |
% |
17 |
% |
|||||
|
Secured by real estate |
|
71 |
% |
66 |
% |
59 |
% |
60 |
% |
66 |
% |
|||||
|
Consumer |
|
1 |
% |
1 |
% |
2 |
% |
2 |
% |
3 |
% |
|||||
As indicated by this table, the provision for loan losses amounted to $1,700 in 2002 compared to $890 for 2001 and $695 for 2000. This increase in the 2002 provision is due in part to the increase in the amount of loans charged off during the year 2002 as compared to 2001. Charged off loans during 2002 totaled $1,163, an increase from 2001 of $553.
The allowance for loan losses amounted to $4,710 for 2002 compared to $4,098 for 2001 and $3,817 for 2000. Allowance levels are the result of the Company’s analysis of probable loan losses and the adequacy level as defined by management’s internal analysis.
21
Nonperforming Assets
One measurement used by management in assessing the risk inherent in the loan portfolio is the level of nonperforming assets. Nonperforming assets consist of nonaccrual loans, restructured loans, investments, other assets owned and other real estate owned. Nonaccrual loans are those loans which have been determined to have reasonable doubt as to the timely collectibility of interest or principal. Restructured loans are those loans whose terms or conditions have been changed and have resulted in a negative impact on the Bank compared to the original terms. Other assets owned include property which the subsidiary bank has obtained in satisfaction of a debt. 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 and other assets owned are 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 or other assets. Past due loans are loans whose principal and interest payments are delinquent 90 days or more and are still accruing interest.
The following table summarizes nonperforming assets and past due loans for the past five years as well as certain information related to interest income on nonaccrual loans:
Table 10
Analysis of Nonperforming Assets and Past Due Loans
|
|
|
December 31, |
|
|||||||||||||
|
|
|
2002 |
|
2001 |
|
2000 |
|
1999 |
|
1998 |
|
|||||
|
Nonaccrual loans |
|
$ |
6,683 |
|
$ |
4,692 |
|
$ |
1,299 |
|
$ |
849 |
|
$ |
1,234 |
|
|
Restructured loans |
|
377 |
|
399 |
|
422 |
|
58 |
|
75 |
|
|||||
|
Loans 90 days or more past due, still accruing interest |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|||||
|
Total nonperforming loans |
|
7,060 |
|
5,091 |
|
1,721 |
|
907 |
|
1,309 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Other real estate owned |
|
185 |
|
— |
|
— |
|
— |
|
— |
|
|||||
|
Other assets owned |
|
601 |
|
— |
|
— |
|
— |
|
— |
|
|||||
|
Total nonperforming assets |
|
$ |
7,846 |
|
$ |
5,091 |
|
$ |
1,721 |
|
$ |
907 |
|
$ |
1,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Percentage of nonperforming loans/total loans |
|
2.47 |
% |
1.68 |
% |
0.59 |
% |
0.36 |
% |
0.67 |
% |
|||||
|
Percentage of nonperforming assets/total assets |
|
1.93 |
% |
1.31 |
% |
0.43 |
% |
0.28 |
% |
0.49 |
% |
|||||
|
Interest income not recognized due to nonaccrual status of loans |
|
$ |
464 |
|
$ |
266 |
|
$ |
109 |
|
$ |
60 |
|
$ |
164 |
|
Nonperforming assets increased as of December 31, 2002, although they still remain at very low levels as a percentage of total assets and total loans. This is a result of adherence to a strong credit culture and the effectiveness of the Subsidiary Bank’s loan administration and workout procedures. As shown in Table 10, at December 31, 2002, nonperforming assets totaled $7,846 compared to $5,091 in 2001. The percentage of nonperforming assets to total assets also increased to 1.93% at December 31, 2002 from 1.31% at December 31, 2001. The majority of this increase relates to ten loans to three borrowers, secured primarily by real estate, totaling $6,255 being placed or remaining on nonaccrual status during the past year. These loans have been analyzed and included in the Bank’s measurement process when reviewing the allowance for loan losses as performed on a quarterly or more frequent basis. Subsequent to December 31, 2002, two of these loans in the amount of $2,508 paid off in full, thereby reducing the $6,255 to $3,747.
We utilized an internal classification system as a means to report problem and potential problem loans. The watch list of problem and potential problem loans include “Special Mention,” “Substandard,” “Doubtful,” and “Loss.” An asset is classified as Special Mention if it is currently protected, but potential problems need attention and correction before payment is undermined. An asset classified as Substandard has well-defined credit weaknesses that jeopardize the liquidation of the debt. Substandard assets are characterized by the distinct possibility the bank may sustain some loss if the deficiencies are not covered. Assets classified as Doubtful have well-defined weaknesses with eventual liquidation in full highly questionable. Assets classified as Loss are viewed uncollectible within a reasonable amount of time. All assets classified as Loss have been charged off. Loans in this category generally include loans that are classified for regulatory purposes. The aggregate principal amount of potential problem loans as of December 31, 2002 and 2001, was approximately $15.5 million and $10 million, respectively. The increase is comprised primarily of three credits totaling $6.2 million.
22
Noninterest Income
Noninterest income consists primarily of service charges on customer deposit accounts. Total noninterest income decreased 28.57% to $1,865. Noninterest income decreased in 2002 from 2001 primarily due to the sale of Concord EFS stock in 2001. The following table analyzes the various sources of noninterest income for the years ended December 31, 2000 through 2002.
Table 11
Noninterest Income Components
|
|
|
December 31, |
|
|||||||
|
|
|
2002 |
|
2001 |
|
2000 |
|
|||
|
Service charges on deposit accounts |
|
$ |
1,482 |
|
$ |
1,609 |
|
$ |
1,831 |
|
|
Other noninterest income |
|
395 |
|
491 |
|
455 |
|
|||
|
Net gains (losses) from sale of loans |
|
(19 |
) |
— |
|
44 |
|
|||
|
Net gains (losses) from sale of OREO |
|
65 |
|
(3 |
) |
— |
|
|||
|
Net losses from sale of other assets |
|
(58 |
) |
— |
|
— |
|
|||
|
Net gains (losses) from sale of securities |
|
— |
|
514 |
|
(45 |
) |
|||
|
Total noninterest income |
|
$ |
1,865 |
|
$ |
2,611 |
|
$ |
2,285 |
|
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 decreased 7.83% in 2002 over 2001 levels. This decrease is primarily the result of a reduction in volume of overdraft activity within the company’s commercial portfolio, as well as the closure of one service charge producing ATM machine.
Noninterest Expense
Total noninterest expense increased slightly by $212 or 1.52% in 2002 after decreasing $8 or .06% in 2001.
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, 2002, the Company had a 64% efficiency ratio as compared to 69% for the prior year’s period. The following table analyzes the various components of noninterest expense for the years ended December 31, 2000 through 2002.
Table 12
Noninterest Expense Components
|
|
|
December 31, |
|
|||||||
|
|
|
2002 |
|
2001 |
|
2000 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Salaries and employee benefits |
|
$ |
7,873 |
|
$ |
7,619 |
|
$ |
7,669 |
|
|
Net occupancy expense |
|
666 |
|
665 |
|
581 |
|
|||
|
Equipment expense |
|
1,005 |
|
977 |
|
932 |
|
|||
|
Outside fees and services |
|
994 |
|
846 |
|
877 |
|
|||
|
Advertising and business |
|
427 |
|
466 |
|
404 |
|
|||
|
Supplies and postage expense |
|
452 |
|
453 |
|
455 |
|
|||
|
Data processing expense |
|
1,324 |
|
1,245 |
|
1,083 |
|
|||
|
Regulatory fees and insurance |
|
289 |
|
298 |
|
272 |
|
|||
|
Other operating expense |
|
1,117 |
|
1,366 |
|
1,670 |
|
|||
|
Total noninterest expense |
|
$ |
14,147 |
|
$ |
13,935 |
|
$ |
13,943 |
|
Total noninterest expense other than salaries and employee benefits decreased $42 from 2001 to 2002. The marginal decrease is the result of slightly higher outside fees and services and data processing expenses offset by lower advertising and business development and other operating expenses.
23
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
Upbancorp and its representatives may from time to time make written or oral statements that are “forward-looking” and provide other than historical information, including statements contained in the Form 10-K, Upbancorp’s other filings with the Securities and Exchange Commission or in communications to its shareholders. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement. These factors include, among other things, the risk factors listed below.
In some cases, Upbancorp has identified forward-looking statements by such words or phrases as “will likely result,” “is confident that,” “expects,” “should, “ “could, “ “may,” “will continue to,” “believes,” “anticipates,” “predicts,” “forecasts,” “estimates,” “projects,” “potential,” “intends” or similar expressions identifying “forward-looking statements” within the meaning of’ the Private Securities Litigation Reform Act of 1995, including the negative of those words and phrases. These forward-looking statements are based on management’s current views and assumptions regarding future events, future business conditions and the outlook for the Company based on currently available information. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, these statements. Upbancorp wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.
In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, Upbancorp is hereby identifying important factors that could affect Upbancorp’s financial performance and could cause Upbancorp’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.
Among the factors that could leave an impact on Upbancorp’s ability to achieve operating results and growth plan goals are,
• Management’s ability to reduce and effectively manage interest rate risk and the impact of interest rates in general on the volatility of the Company’s net interest income;
• Fluctuations in the value of Upbancorp’s investment securities;
• The ability to attract and retain senior management experienced in banking and financial services;
• The sufficiency of allowances for possible loan losses to absorb the amount of actual future losses inherent in the existing portfolio of loans;
• Upbancorp’s ability to adapt successfully to technological changes to compete effectively in the marketplace;
• Credit risks and risks from concentrations (by geographic area and by industry) within the Subsidiary Bank’s loan portfolio;
• The effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in Upbancorp’s market or elsewhere providing similar services;
• The failure of assumptions underlying the establishment of reserves for loan losses and estimations of values of collateral and various financial assets and liabilities,
• Volatility of rate sensitive deposits;
• Operational risks, including data processing system failures or fraud;
• Asset/liability matching risks and liquidity risks;
• Changes in the economic environment, competition or other factors that may influence the anticipated growth rate of loans and deposits, the quality of the loan portfolio and loan and deposit pricing and Upbancorp’s ability to successfully pursue acquisition and expansion strategies;
24
• The impact from liabilities arising from legal or administrative proceedings the financial condition of Upbancorp;
• Governmental monetary and fiscal policies, as well as legislative and regulatory changes, that may result in the imposition of costs and constraints on Upbancorp through higher FDIC insurance premiums, significant fluctuations in market interest rates and operational limitations;
• Changes in general economic or industry conditions, nationally or in the communities in which Upbancorp conducts business;
• Changes in accounting principles, policies or guidelines affecting the businesses conducted by Upbancorp or the Bank Subsidiary;
• Acts of war or terrorism; and
• Other economic, competitive, governmental, regulatory and technical factors affecting Upbancorp’s operations, products, services, and prices.
Upbancorp wishes to caution that the foregoing list of important factors may not be all-inclusive and specifically declines to undertake any obligation to publicly revise any forward-looking statements that have been made to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
With respect to forward-looking statements set forth in the notes to consolidated financial statements, including those relating to contingent liabilities and legal proceedings, as well as Upbancorp’s 2002 Annual Report on Form 10-K, some of the factors that could affect the ultimate disposition of those contingencies are changes in applicable laws, the development of facts in individual cases, settlement opportunities and the actions of plaintiffs, judges and juries.
The following information should be read in conjunction with the consolidated financial statements of Upbancorp and notes thereto, appearing elsewhere in this report.
Upbancorp’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and are consistent with predominant practices in the financial services industry. Application of critical accounting policies, those policies Management believes are the most important to Upbancorp’s financial position and results, requires Management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes and are based on information available as of the date of the financial statements. Future changes in information may affect these estimates, assumptions, and judgments, which in turn may affect amounts reported in the financial statements.
Most accounting policies are not considered by management to be critical accounting policies. The most significant of these policies are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, Management has determined that its accounting policies with respect to the allowance for loan losses and defined benefit plan and supplemental executive retirement plan are the accounting areas requiring subjective or complex judgments that are most important to Upbancorp’s financial position and results of operations. Those policies are considered to be critical accounting policies and are discussed below.
25
Arriving at an appropriate level of reserve for loan losses involves a high degree of judgment. Upbancorp’s reserve for loan losses provides for probable losses based upon evaluations of known, and inherent risks in the loan portfolio. Management uses historical information to assess the adequacy of the reserve for loan losses as well as the prevailing business environment; as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. The reserve is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off. For a full discussion of Upbancorp’s methodology of assessing the adequacy of the reserve for loan losses, see Note 1 to “Notes to Consolidated Financial Statements” of this Form 10-K.
Defined Benefit Plan and Supplemental Executive Retirement Plan
The Plans’ assets and liabilities are determined on an actuarial basis and are affected by the estimated market-related value of plan assets, estimates of the expected return on plan assets, discount rates and other assumptions inherent in these valuations. The Company reviews annually the assumptions underlying the actuarial calculations and makes changes to these assumptions, based on current market conditions, as necessary. Actual changes in the fair market value of plan assets and differences between the actual return on plan assets and the expected return on plan assets will affect the amount of pension expense (income) ultimately recognized.
26
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ON MARKET RISK
While Table 3, found in Item 7 of this Form 10-K, 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, 2002 and 2001, was as follows:
|
|
|
Basis Point Change |
|
||||||||||
|
|
|
+200 |
|
+100 |
|
+50 |
|
-50 |
|
-100 |
|
-200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2002 |
|
-0.90 |
% |
-0.46 |
% |
-0.23 |
% |
-0.07 |
% |
-0.13 |
% |
-1.53 |
% |
|
At December 31, 2001 |
|
-1.19 |
% |
-0.62 |
% |
-0.40 |
% |
-0.04 |
% |
-0.32 |
% |
-0.66 |
% |
Based upon these analyses, management has determined there has been no material change at December 31, 2002, in interest rate risk for the Company, from December 31, 2001, calculated results.
27
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Upbancorp, Inc.
Consolidated
Statements of Condition
|
(Dollars
in thousands, except share data) |
|
2002 |
|
2001 |
|
||
|
Assets |
|
|
|
|
|
||
|
Cash and due from banks |
|
$ |
13,758 |
|
$ |
14,736 |
|
|
Federal funds sold |
|
40,500 |
|
— |
|
||
|
Securities available-for-sale |
|
57,823 |
|
60,614 |
|
||
|
Nonmarketable equity securities |
|
1,891 |
|
1,818 |
|
||
|
Mortgages held-for-sale |
|
— |
|
945 |
|
||
|
Loans, net of allowance for loan losses of $4,710 and $4,098 in 2002 and 2001 |
|
281,003 |
|
299,630 |
|
||
|
Premises and equipment, net |
|
5,010 |
|
5,146 |
|
||
|
Accrued interest and other assets |
|
7,135 |
|
6,564 |
|
||
|
Total Assets |
|
$ |
407,120 |
|
$ |
389,453 |
|
|
|
|
|
|
|
|
||
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
||
|
Liabilities |
|
|
|
|
|
||
|
Demand deposits, noninterest-bearing |
|
$ |
89,200 |
|
$ |
72,472 |
|
|
Savings, NOW and money market deposits |
|
125,928 |
|
130,309 |
|
||
|
Time deposits |
|
129,537 |
|
121,244 |
|
||
|
Total deposits |
|
344,665 |
|
324,025 |
|
||
|
Borrowed funds - short-term |
|
994 |
|
7,880 |
|
||
|
Borrowed funds - long-term |
|
21,500 |
|
21,500 |
|
||
|
Note payable |
|
3,000 |
|
3,000 |
|
||
|
Accrued interest and other liabilities |
|
3,279 |
|
3,692 |
|
||
|
Total Liabilities |
|
373,438 |
|
360,097 |
|
||
|
Shareholders’ Equity |
|
|
|
|
|
||
|
Common stock, $1 par value: authorized 3,000,000 shares; issued 1,000,000 shares |
|
1,000 |
|
1,000 |
|
||
|
Additional paid in capital |
|
4,500 |
|
4,500 |
|
||
|
Retained earnings |
|
30,326 |
|
26,588 |
|
||
|
Treasury stock - 164,945 shares |
|
(3,079 |
) |
(3,079 |
) |
||
|
Accumulated other comprehensive income, net |
|
935 |
|
347 |
|
||
|
Total Shareholders’ Equity |
|
33,682 |
|
29,356 |
|
||
|
Total Liabilities and Shareholders’ Equity |
|
$ |
407,120 |
|
$ |
389,453 |
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
28
UPBANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
|
(Dollars
in thousands, except share data) |
|
2002 |
|
2001 |
|
2000 |
|
|||
|
Interest Income |
|
|
|
|
|
|
|
|||
|
Interest and fees on loans |
|
$ |
23,889 |
|
$ |
26,584 |
|
$ |
26,198 |
|
|
Interest on mortgages held-for-sale |
|
19 |
|
44 |
|
— |
|
|||
|
Interest on federal funds sold and other |
|
166 |
|
364 |
|
621 |
|
|||
|
Interest and dividends on securities: |
|
|
|
|
|
|
|
|||
|
Taxable |
|
3,137 |
|
3,617 |
|
2,883 |
|
|||
|
Nontaxable |
|
530 |
|
376 |
|
388 |
|
|||
|
Total Interest Income |
|
27,741 |
|
30,985 |
|
30,090 |
|
|||
|
Interest Expense |
|
|
|
|
|
|
|
|||
|
Interest on savings, NOW, and money market deposits |
|
1,989 |
|
3,626 |
|
4,343 |
|
|||
|
Interest on other time deposits |
|
4,258 |
|
8,415 |
|
7,058 |
|
|||
|
Interest on borrowed funds |
|
1,057 |
|
1,154 |
|
1,579 |
|
|||
|
Interest on note payable |
|
107 |
|
178 |
|
125 |
|
|||
|
Total Interest Expense |
|
7,411 |
|
13,373 |
|
13,105 |
|
|||
|
Net Interest Income |
|
20,330 |
|
17,612 |
|
16,985 |
|
|||
|
Provision for Loan Losses |
|
1,700 |
|
890 |
|
695 |
|
|||
|
Net Interest Income after Provision for Loan Losses |
|
18,630 |
|
16,722 |
|
16,290 |
|
|||
|
Noninterest Income |
|
|
|
|
|
|
|
|||
|
Service charges on deposit accounts |
|
1,482 |
|
1,609 |
|
1,831 |
|
|||
|
Other noninterest income |
|
395 |
|
491 |
|
455 |
|
|||
|
Net gains (losses) on sale of loans |
|
(19 |
) |
— |
|
44 |
|
|||
|
Net gains (losses) on sale of OREO |
|
65 |
|
(3 |
) |
— |
|
|||
|
Net losses on sale of other assets |
|
(58 |
) |
— |
|
— |
|
|||
|
Net gains (losses) from sale of securities |
|
— |
|
514 |
|
(45 |
) |
|||
|
Total Noninterest Income |
|
1,865 |
|
2,611 |
|
2,285 |
|
|||
|
Noninterest Expense |
|
|
|
|
|
|
|
|||
|
Salaries and employee benefits |
|
7,873 |
|
7,619 |
|
7,669 |
|
|||
|
Net occupancy expense |
|
666 |
|
665 |
|
581 |
|
|||
|
Equipment expense |
|
1,005 |
|
977 |
|
932 |
|
|||
|
Outside fees and services |
|
994 |
|
846 |
|
877 |
|
|||
|
Advertising and business development expense |
|
427 |
|
466 |
|
404 |
|
|||
|
Supplies and postage expense |
|
452 |
|
453 |
|
455 |
|
|||
|
Data processing expense |
|
1,324 |
|
1,245 |
|
1,083 |
|
|||
|
Regulatory fees and insurance |
|
289 |
|
298 |
|
272 |
|
|||
|
Other operating expense |
|
1,117 |
|
1,366 |
|
1,670 |
|
|||
|
Total Noninterest Expense |
|
14,147 |
|
13,935 |
|
13,943 |
|
|||
|
Income Before Income Taxes |
|
6,348 |
|
5,398 |
|
4,632 |
|
|||
|
Income taxes |
|
2,176 |
|
1,915 |
|
1,611 |
|
|||
|
Net Income |
|
$ |
4,172 |
|
$ |
3,483 |
|
$ |
3,021 |
|
|
|
|
|
|
|
|
|
|
|||
|
Basic earnings per share |
|
$ |
5.00 |
|
$ |
4.17 |
|
$ |
3.61 |
|
|
Weighted average shares outstanding |
|
835,055 |
|
835,055 |
|
836,478 |
|
|||
The accompanying notes to consolidated financial statements are an integral part of these statements.
29
UPBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
|
(Dollars
in thousands, except share data) |
|
2002 |
|
2001 |
|
2000 |
|
|||
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|||
|
Net income |
|
$ |
4,172 |
|
$ |
3,483 |
|
$ |
3,021 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|||
|
Provision for loan losses |
|
1,700 |
|
890 |
|
695 |
|
|||
|
Depreciation and amortization |
|
1,360 |
|
1,392 |
|
1,299 |
|
|||
|
Net loss (gain) on securities |
|
— |
|
(514 |
) |
45 |
|
|||
|
Net loss (gain) on sales of loans |
|
19 |
|
— |
|
(44 |
) |
|||
|
Net (gain) loss on sale of other real estate owned |
|
(65 |
) |
3 |
|
— |
|
|||
|
Net loss on sale of other assets |
|
58 |
|
— |
|
— |
|
|||
|
Change in deferred income taxes |
|
(219 |
) |
(609 |
) |
453 |
|
|||
|
Accretion on investment securities, net |
|
(2,068 |
) |
(797 |
) |
(418 |
) |
|||
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|||
|
(Increase) decrease in accrued interest and other assets |
|
23 |
|
10 |
|
(1,166 |
) |
|||
|
Increase (decrease) in accrued interest and other liabilities |
|
(413 |
) |
(685 |
) |
913 |
|
|||
|
Net cash provided by operating activities before loan originations and sales |
|
4,567 |
|
3,173 |
|
4,798 |
|
|||
|
Originations of mortgages held-for-sale |
|
(12,416 |
) |
(13,344 |
) |
(938 |
) |
|||
|
Proceeds from sales of mortgages held-for-sale |
|
13,303 |
|
12,399 |
|
2,246 |
|
|||
|
Net cash provided by operating activities |
|
5,454 |
|
2,228 |
|
6,106 |
|
|||
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|||
|
Net (increase) decrease in federal funds sold |
|
(40,500 |
) |
12,600 |
|
(7,870 |
) |
|||
|
Purchases of available-for-sale and nonmarketable equity securities |
|
(40,291 |
) |
(49,564 |
) |
(50,893 |
) |
|||
|
Proceeds from maturities and redemptions of available-for-sale and nonmarketable equity securities |
|
46,040 |
|
41,524 |
|
28,205 |
|
|||
|
Proceeds from sales of available-for-sale securities |
|
— |
|
15,018 |
|
5,447 |
|
|||
|
Net (increase) decrease in loans |
|
14,598 |
|
(12,198 |
) |
(42,578 |
) |
|||
|
Proceeds from sales of premises and equipment |
|
— |
|
900 |
|
— |
|
|||
|
Purchases of premises and equipment |
|
(1,207 |
) |
(1,827 |
) |
(738 |
) |
|||
|
Proceeds from sale of other assets owned |
|
393 |
|
— |
|
— |
|
|||
|
Proceeds from sale of other real estate |
|
1,215 |
|
163 |
|
— |
|
|||
|
Net cash provided by (used in) investing activities |
|
(19,752 |
) |
6,616 |
|
(68,427 |
) |
|||
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|||
|
Net increase (decrease) in total deposits |
|
20,640 |
|
(24,523 |
) |
78,393 |
|
|||
|
Proceeds from borrowed funds, short-term |
|
3,614 |
|
3,500 |
|
215 |
|
|||
|
Payments on borrowed funds, short-term |
|
(10,500 |
) |
(469 |
) |
(9,000 |
) |
|||
|
Proceeds from borrowed funds, long-term |
|
— |
|
16,500 |
|
9,000 |
|
|||
|
Payments on borrowed funds, long-term |
|
— |
|
(5,000 |
) |
(14,000 |
) |
|||
|
Proceeds from note payable |
|
— |
|
— |
|
3,000 |
|
|||
|
Cash dividends paid |
|
(434 |
) |
(435 |
) |
(435 |
) |
|||
|
Purchase of treasury stock |
|
— |
|
— |
|
(59 |
) |
|||
|
Net cash provided by (used in) financing activities |
|
13,320 |
|
(10,427 |
) |
67,114 |
|
|||
|
Net increase (decrease) in cash and due from banks |
|
(978 |
) |
(1,583 |
) |
4,793 |
|
|||
|
Cash and due from banks at beginning of period |
|
14,736 |
|
16,319 |
|
11,526 |
|
|||
|
Cash and due from banks at end of period |
|
$ |
13,758 |
|
$ |
14,736 |
|
$ |
16,319 |
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|||
|
Cash payments: |
|
|
|
|
|
|
|
|||
|
Interest |
|
$ |
7,872 |
|
$ |
14,119 |
|
$ |
12,123 |
|
|
Income taxes |
|
$ |
3,207 |
|
$ |
2,315 |
|
$ |
1,848 |
|
|
|
|
|
|
|
|
|
|
|||
|
Supplemental Schedule of Noncash Investing Activities |
|
|
|
|
|
|
|
|||
|
Other real estate acquired in settlement of loans |
|
$ |
1,335 |
|
$ |
166 |
|
$ |
— |
|
|
Other assets acquired in settlement of loans |
|
$ |
994 |
|
$ |
— |
|
$ |
— |
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
30
UPBANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands, except share data)
|
|
|
Common |
|
Additional |
|
Retained |
|
Treasury |
|
Other |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Balance, December 31, 1999 |
|
$ |
1,000 |
|
$ |
4,500 |
|
$ |
20,954 |
|
$ |
(3,020 |
) |
$ |
(910 |
) |
$ |
22,524 |
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net income |
|
— |
|
— |
|
3,021 |
|
— |
|
— |
|
3,021 |
|
||||||
|
Net unrealized gains on securities available-for-sale, net of tax of $522 |
|
— |
|
— |
|
— |
|
— |
|
819 |
|
819 |
|
||||||
|
Reclassification adjustment for losses realized in net income, net of tax of $18 |
|
— |
|
— |
|
— |
|
— |
|
27 |
|
27 |
|
||||||
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
3,867 |
|
||||||
|
Cash dividends: $.52 per share |
|
— |
|
— |
|
(435 |
) |
— |
|
— |
|
(435 |
) |
||||||
|
Purchase of treasury stock |
|
— |
|
— |
|
— |
|
(59 |
) |
— |
|
(59 |
) |
||||||
|
Balance, December 31, 2000 |
|
$ |
1,000 |
|
$ |
4,500 |
|
$ |
23,540 |
|
$ |
(3,079 |
) |
$ |
(64 |
) |
$ |
25,897 |
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net income |
|
— |
|
— |
|
3,483 |
|
— |
|
— |
|
3,483 |
|
||||||
|
Net unrealized gains on securities available-for-sale, net of tax of $287 |
|
— |
|
— |
|
— |
|
— |
|
448 |
|
448 |
|
||||||
|
Reclassification adjustment for gains realized in net income,net of tax of $(25) |
|
— |
|
— |
|
— |
|
— |
|
(37 |
) |
(37 |
) |
||||||
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
3,894 |
|
||||||
|
Cash dividends: $.52 per share |
|
— |
|
— |
|
(435 |
) |
— |
|
— |
|
(435 |
) |
||||||
|
Balance, December 31, 2001 |
|
$ |
1,000 |
|
$ |
4,500 |
|
$ |
26,588 |
|
$ |
(3,079 |
) |
$ |
347 |
|
$ |
29,356 |
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net income |
|
— |
|
— |
|
4,172 |
|
— |
|
— |
|
4,172 |
|
||||||
|
Net unrealized gains on securities available-for-sale, net of tax of $375 |
|
— |
|
— |
|
— |
|
— |
|
588 |
|
588 |
|
||||||
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
4,760 |
|
||||||
|
Cash dividends: $.52 per share |
|
— |
|
— |
|
(434 |
) |
— |
|
— |
|
(434 |
) |
||||||
|
Balance, December 31, 2002 |
|
$ |
1,000 |
|
$ |
4,500 |
|
$ |
30,326 |
|
$ |
(3,079 |
) |
$ |
935 |
|
$ |
33,682 |
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
31
UPBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
(Dollars in thousands, except share data)
Note 1: Summary of Significant Accounting Policies
Nature of business:
Upbancorp, Inc. (“Upbancorp” or the “Company”), is a bank holding company, organized in 1983 under the laws of the State of Delaware. The Company owns all of the outstanding common stock of Uptown National Bank of Chicago (“Uptown”), organized in 1929 and located in Chicago, Illinois. Heritage Bank, a division of Uptown National Bank of Chicago (“Heritage”), was organized in 1977 and is located in the Phoenix metropolitan area. Upbancorp does not engage in any activities other than providing administrative services and acting as a holding company for Uptown.
Uptown is a full-service community bank which operates seven banking offices and one loan production office in the Chicagoland area and metropolitan Phoenix area. Uptown is engaged in the general commercial banking business in addition to offering a complete range of retail banking services. Uptown conducts general banking business, both commercial and consumer including: the acceptance and servicing of demand, savings, and time deposit accounts; commercial, industrial, consumer and real estate lending; collections; safe deposit box operations; and other banking services tailored for both commercial and retail clients.
Uptown has a wholly-owned subsidiary, Broadway Clark Building Corporation (“BCBC”), which owns all of the real estate that is used in connection with the operation of Uptown’s Chicagoland area business with the exception of four facilities, which are leased.
Principles of consolidation:
The consolidated financial statements include the accounts of Upbancorp and its wholly-owned subsidiary Uptown (including its wholly-owned subsidiary BCBC) after elimination of all intercompany balances and transactions.
Basis of financial statement presentation:
The accounting and reporting policies of the Company conform to generally accepted accounting principles. In preparing the accompanying consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and the accompanying notes. Significant estimates which are particularly susceptible to change in a short period of time include the determination of the fair value of securities and the allowance for loan losses. Actual results could differ from those estimates.
Based on the Company’s approach to decision making, it has concluded that its business is comprised of a single segment.
Securities:
Securities classified as available-for-sale are those debt securities the Subsidiary Bank intends to hold for an indefinite period of time, but not necessarily to maturity and equity securities. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Subsidiary Bank’s assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors.
Securities available-for-sale are reported at fair value with unrealized gains or losses reported as a separate component of other comprehensive income net of the related deferred tax effect. The amortization of premiums and accretion of discounts, computed by the interest method over their contractual lives, are recognized in interest income.
Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings.
Declines in the fair value of individual securities classified as either held-to-maturity or available-for-sale below their amortized cost that are determined to be other than temporary result in write-downs of the individual securities to their fair value with the resulting write-downs included in current earnings as realized losses.
32
Nonmarketable equity securities:
The Bank owns an investment in capital stock in the Federal Reserve Bank. Also, as a member of the Federal Home Loan Bank System, the Bank is required to maintain an investment in capital stock of the Federal Home Loan Bank in an amount equal to 1 percent of its outstanding mortgage loans. No ready market exists for these securities and they have no quoted market value. These securities are redeemable at par; therefore, market value equals cost.
Mortgages held-for-sale:
Mortgages held-for-sale are those loans the Bank has the intent to sell in the foreseeable future. They are carried at the lower of aggregate cost or market value. Gains or losses on sales of loans are recognized at settlement dates and are determined by the difference between the sales proceeds and the carrying value of the loans. 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, the allowance for loan losses, and deferred loan fees.
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 on any loan is discontinued when, in the opinion of management, there is reasonable doubt as to the collectibility of interest or principal. It is management’s policy to place loans on nonaccrual when principal and interest is 90 days or more past due. Such loans may continue on accrual only when they are both well secured and in the process of collection.
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. All 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. We maintain our allowance for loan losses at a level that management believes will be adequate to absorb probable losses on existing loans based on an evaluation of the collectibility of loans and prior loss experience. We use a risk rating system to evaluate the adequacy of the allowance for loan losses. With this system, each loan is risk rated between one and eight, by the originating loan officer or loan committee, with one being the best case and eight being a loss or the worst case. Loan loss reserve factors are multiplied against the balances in each risk-rating category to determine an appropriate level for the allowance for loan losses. Loans with risk ratings between five and eight are monitored much closer by the officers. Control of our loan quality is continually monitored by our management and our loan committee on a monthly basis. This is also reviewed and monitored by our board of directors on a quarterly basis and is continually subjected to oversight by our board of directors through its members who serve on the loan committee. We consistently apply our methodology for determining the adequacy of the allowance for loan losses, but may make adjustments to our methodologies and assumptions based on historical information related to charge-offs and management’s evaluation of the current loan portfolio. Additionally, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make additions to the allowance based on their judgement about information available to them at the time of their examinations.
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. Management periodically reviews the carrying value of its long-lived assets to determine if an impairment has occurred or whether changes in circumstances have occurred that would require a revision to the remaining useful life. In making such determination, management evaluates the performance, on an undiscounted basis, of the underlying operations or assets which give rise to such amount.
33
Transfers of financial assets:
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Income taxes:
As part of the process of preparing the consolidated financial statements the Company is required to estimate income taxes for federal and state purposes. This process involves estimating the Company’s actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Company’s consolidated statements of financial condition. Management must then assess the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent management believes that recovery is not likely, a valuation allowance must be established. To the extent the Company establishes a valuation allowance or increases this allowance in a period, the Company would include an expense within the tax provision in the statements of income. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. A valuation allowance is based on management’s estimates of taxable income in the jurisdictions in which the Company operates and the period over which deferred tax assets will be recoverable. In the event actual results differ from these estimates, or if management adjusts these estimates in future periods the Company may need to establish an additional valuation allowance which could materially impact the financial position and results of operations.
Comprehensive income:
Accounting principles require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities are reported as a separate component of the equity sections of the balance sheet, such items, along with net income, are components of comprehensive income.
Earnings per common share:
Basic earnings per share are calculated using the weighted average number of shares outstanding during the year. Diluted earnings do not differ from basic earnings per share.
Reclassifications:
Certain amounts in the 2001 and 2000 consolidated financial statements have been reclassified to conform with the 2002 presentation. Such reclassifications have no effect on previously reported net income.
Guarantees:
The Financial Accounting Standards Board has issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” - an interpretation of FASB Statement Nos. 5, 57, and 107 and rescission of FASB Interpretation No. 34. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of the Interpretation are applicable on a prospective basis to guarantees issued or modified after December 15, 2002. Implementation of these provisions of the Interpretation is not expected to have a material impact on the Company’s consolidated financial statements. The disclosure requirements of the Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002, and have been adopted in the consolidated financial statements for December 31, 2002.
Note 2. Restrictions on Cash and Due From Banks
The Subsidiary Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The total of these reserve balances was approximately $549 and $439 at December 31, 2002 and 2001.
34
Note 3. Securities
The amortized cost and fair value of securities available-for-sale are as follows at December 31:
|
|
|
2002 |
|
||||||||||
|
|
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
|
||||
|
U.S. Government agencies |
|
$ |
43,154 |
|
$ |
912 |
|
$ |
— |
|
$ |
44,066 |
|
|
States and political subdivisions |
|
11,574 |
|
596 |
|
— |
|
12,170 |
|
||||
|
Mortgage-backed securities |
|
64 |
|
3 |
|
— |
|
67 |
|
||||
|
Total debt securities |
|
54,792 |
|
1,511 |
|
— |
|
56,303 |
|
||||
|
Equity securities |
|
1,500 |
|
40 |
|
20 |
|
1,520 |
|
||||
|
Total securities available-for-sale |
|
$ |
56,292 |
|
$ |
1,551 |
|
$ |
20 |
|
$ |
57,823 |
|
|
|
|
2001 |
|
||||||||||
|
|
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
|
||||
|
U.S. Government agencies |
|
$ |
49,704 |
|
$ |
839 |
|
$ |
172 |
|
$ |
50,371 |
|
|
States and political subdivisions |
|
8,842 |
|
118 |
|
202 |
|
8,758 |
|
||||
|
Total debt securities |
|
58,546 |
|
957 |
|
374 |
|
59,129 |
|
||||
|
Equity securities |
|
1,500 |
|
30 |
|
45 |
|
1,485 |
|
||||
|
Total securities available-for-sale |
|
$ |
60,046 |
|
$ |
987 |
|
$ |
419 |
|
$ |
60,614 |
|
The amortized cost and fair value of debt securities available-for-sale at December 31, 2002, by contractual maturity, are shown below.
|
|
|
Amortized |
|
Fair |
|
||
|
Due in one year or less |
|
$ |
1,000 |
|
$ |
1,012 |
|
|
Due after one year through five years |
|
11,975 |
|
12,429 |
|
||
|
Due after five years through ten years |
|
7,408 |
|
7,617 |
|
||
|
Due after ten years |
|
34,345 |
|
35,178 |
|
||
|
Mortgage-backed securities |
|
64 |
|
67 |
|
||
|
Total debt securities |
|
$ |
54,792 |
|
$ |
56,303 |
|
Gross gains realized were $0 in 2002, $595 in 2001 and $7 in 2000. Gross losses realized were $0 in 2002, $81 in 2001 and $52 in 2000.
Investment securities carried at approximately $33,001 and $34,722 at December 31, 2002 and 2001, respectively, were pledged to secure public and trust deposits, borrowed funds and for other purposes as required or permitted by law.
35
Note 4. Loans
Major classifications of loans are as follows at December 31:
|
|
|
2002 |
|
2001 |
|
||
|
Commercial - Aircraft related |
|
$ |
32,683 |
|
$ |
45,726 |
|
|
Commercial - Other |
|
47,365 |
|
56,453 |
|
||
|
Real estate - Construction |
|
70,515 |
|
65,821 |
|
||
|
Real estate - Residential (1 to 4 family) |
|
25,882 |
|
33,998 |
|
||
|
Real estate - Residential (5 or more) |
|
36,255 |
|
37,522 |
|
||
|
Real estate - Non-Residential |
|
71,131 |
|
61,798 |
|
||
|
Consumer and all other |
|
2,410 |
|
2,946 |
|
||
|
Deferred loan fees |
|
(528 |
) |
(536 |
) |
||
|
Total loans |
|
285,713 |
|
303,728 |
|
||
|
Less allowance for loan losses |
|
(4,710 |
) |
(4,098 |
) |
||
|
Total loans, net of allowance for loan losses |
|
$ |
281,003 |
|
$ |
299,630 |
|
Changes in the allowance for loan losses account are summarized below:
|
|
|
Years Ended December 31, |
|
|||||||
|
|
|
2002 |
|
2001 |
|
2000 |
|
|||
|
Balance at beginning of year |
|
$ |
4,098 |
|
$ |
3,817 |
|
$ |
3,114 |
|
|
Provision for loan losses |
|
1,700 |
|
890 |
|
695 |
|
|||
|
Loans charged-off |
|
(1,163 |
) |
(610 |
) |
(10 |
) |
|||
|
Recoveries on loans previously charged-off |
|
75 |
|
1 |
|
18 |
|
|||
|
Balance at end of year |
|
$ |
4,710 |
|
$ |
4,098 |
|
$ |
3,817 |
|
As of December 31, 2002 and 2001, the Company’s recorded investment in impaired loans and the related valuation allowance are as follows:
|
|
|
2002 |
|
2001 |
|
||||||||
|
|
|
Carrying |
|
Valuation |
|
Carrying |
|
Valuation |
|
||||
|
Impaired loans |
|
|
|
|
|
|
|
|
|
||||
|
Valuation allowance required |
|
$ |
3,168 |
|
$ |
1,050 |
|
$ |
446 |
|
$ |
150 |
|
|
No valuation allowance required |
|
4,367 |
|
— |
|
4,645 |
|
— |
|
||||
|
Total impaired loans |
|
$ |
7,535 |
|
$ |
1,050 |
|
$ |
5,091 |
|
$ |
150 |
|
The valuation allowance is included in the allowance for loan losses on the statements of condition. The average recorded investment in impaired loans for years ended December 31, 2002 and 2001, was $5,898 and $3,040, respectively. No interest income was recognized in 2002, 2001 and 2000, on impaired loans.
36
The following table summarizes the amounts of nonperforming loans and nonperforming assets at December 31:
|
|
|
2002 |
|
2001 |
|
||
|
|
|
|
|
|
|
||
|
Non-accruing loans |
|
$ |
6,683 |
|
$ |
4,692 |
|
|
Restructured loans |
|
377 |
|
399 |
|
||
|
Loans 90 days or more past due, still accruing interest |
|
— |
|
— |
|
||
|
Non-performing loans |
|
7,060 |
|
5,091 |
|
||
|
Other real estate owned |
|
185 |
|
— |
|
||
|
Other assets owned |
|
601 |
|
— |
|
||
|
Non-performing assets |
|
$ |
7,846 |
|
$ |
5,091 |
|
Note 5. Premises and Equipment
The following is a summary of bank premises and equipment at December 31:
|
|
|
2002 |
|
2001 |
|
||
|
|
|
|
|
|
|
||
|
Land |
|
$ |
606 |
|
$ |
606 |
|
|
Buildings and improvements |
|
12,356 |
|
11,974 |
|
||
|
Furniture, fixtures and equipment |
|
9,440 |
|
9,138 |
|
||
|
Total cost |
|
22,402 |
|
21,718 |
|
||
|
Accumulated depreciation |
|
(17,392 |
) |
(16,572 |
) |
||
|
Premises and equipment, net |
|
$ |
5,010 |
|
$ |
5,146 |
|
Depreciation expense on premises and equipment totaled $1,343, $1,307 and $1,192 for 2002, 2001 and 2000, respectively.
The building owned by BCBC, in which the main facility of the Bank is located, has stores and offices which are rented. Total rent received was $1,129, $1,146 and $1,127 in 2002, 2001 and 2000, respectively and is recorded as a reduction of net occupancy expense.
Note 6. Deposits
The aggregate amount of certificates of deposits of $100 or more totaled $62,965 and $48,075 at December 31, 2002 and 2001.
Maturities of time deposits are summarized as follows at December 31:
|
2003 |
|
$ |
118,766 |
|
|
2004 |
|
7,092 |
|
|
|
2005 |
|
1,808 |
|
|
|
2006 |
|
1,425 |
|
|
|
2007 |
|
446 |
|
|
|
|
|
$ |
129,537 |
|
At December 31, 2002, the Company has a concentration of deposits with one customer in the amount of $32,415 which are included in demand deposits.
37
Note 7. Borrowed Funds and Note Payable
At December 31, 2002 and 2001, borrowed funds and note payable consisted of:
|
|
|
2002 |
|
2001 |
|
||
|
Federal funds purchased |
|
$ |
— |
|
$ |
3,500 |
|
|
Securities sold under agreements to repurchase and |
|
|
|
|
|
||
|
U.S. Treasury tax and loan note accounts |
|
994 |
|
380 |
|
||
|
Federal Home Loan Bank borrowing, due July 3, 2002, 1.96% variable rate |
|
— |
|
4,000 |
|
||
|
Total borrowed funds - short term |
|
994 |
|
7,880 |
|
||
|
FHLB borrowing, due January 20, 2008, 5.05% convertible fixed rate |
|
5,000 |
|
5,000 |
|
||
|
FHLB borrowing, due January 4, 2011, 4.65% convertible fixed rate |
|
7,000 |
|
7,000 |
|
||
|
FHLB borrowing, due March 20, 2011, 4.075% convertible fixed rate |
|
5,000 |
|
5,000 |
|
||
|
FHLB borrowing, due September 26, 2011, 3.80% convertible fixed rate |
|
4,500 |
|
4,500 |
|
||
|
Total borrowed funds - long term |
|
21,500 |
|
21,500 |
|
||
|
Note payable, due March 1, 2004, 2.90% variable rate |
|
3,000 |
|
3,000 |
|
||
|
|
|
$ |
25,494 |
|
$ |
32,380 |
|
Uptown has an arrangement with the Federal Home Loan Bank of Chicago whereby the FHLB will make advances to the Bank with repayment terms from overnight to ten years. The Bank is eligible to obtain credit up to 20 times the member Bank’s holding of Federal Home Loan Capital Stock; these eligible borrowings amount to $29,000.
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.
The Company has a $10 million line of credit, a secured revolving note payable, with a correspondent bank at December 31, 2002. This note had an outstanding balance of $3 million at such date. Interest is calculated on the basis of 3-month LIBOR plus 150 basis points (2.90% at December 31, 2002) with interest due and payable quarterly. The expiration date of the line is March 1, 2003. The note also contains certain covenants which limit changes in capital structure, the purchase of or merger with other banks and/or businesses, and the guarantees of other liabilities and obligations. In addition, the Company must meet certain financial ratios. Subsequent to December 31, 2002, the note payable was renewed under the same terms and conditions with an expiration date of March 1, 2004.
Note 8. Pension Plans
Uptown has a defined benefit plan covering substantially all employees in the Company. The plan is based on years of service and the employee’s average compensation during all years of employment. The Company’s funding policy is to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974 (“ERISA”), plus additional amounts as appropriate. In addition, the Company also has a Supplemental Executive Retirement Plan (the “SERP”) for certain executive officers.
38
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, 2002, and a statement of the Plans’ funded status as of December 31 of both years:
|
|
|
Pension Benefits |
|
||||
|
Amounts in ($000) |
|
2002 |
|
2001 |
|
||
|
|
|
|
|
|
|
||
|
Reconciliation of benefit obligation: |
|
|
|
|
|
||
|
Net obligation at beginning of the year |
|
$ |
8,698 |
|
$ |
7,380 |
|
|
Service cost |
|
307 |
|
260 |
|
||
|
Interest cost |
|
603 |
|
575 |
|
||
|
Plan amendments |
|
— |
|
8 |
|
||
|
Actuarial (gain) loss |
|
482 |
|
803 |
|
||
|
Gross benefits paid |
|
(329 |
) |
(328 |
) |
||
|
Net obligation at end of the year |
|
$ |
9,761 |
|
$ |
8,698 |
|
|
|
|
|
|
|
|
||
|
Reconciliation of fair value of plan assets: |
|
|
|
|
|
||
|
Fair value of plan assets at beginning year |
|
$ |
7,519 |
|
$ |
8,256 |
|
|
Actual return on plan assets |
|
(256 |
) |
(409 |
) |
||
|
Employer contributions |
|
425 |
|
— |
|
||
|
Gross benefits paid |
|
(329 |
) |
(328 |
) |
||
|
Fair value of plan assets at end of the year |
|
$ |
7,359 |
|
$ |
7,519 |
|
|
|
|
|
|
|
|
||
|
Funded status: |
|
|
|
|
|
||
|
Funded status at end of the year |
|
$ |
(2,402 |
) |
$ |
(1,179 |
) |
|
Unrecognized prior service cost |
|
463 |
|
512 |
|
||
|
Actuarial gain (loss) |
|
2,692 |
|
1,384 |
|
||
|
Net amount recognized |
|
$ |
753 |
|
$ |
717 |
|
The net amount recognized is recorded in the financial statements with $1,310 in other assets and $557 in other liabilities
As of December 31, 2002, the benefit obligations of the defined benefit plan and the SERP were $8,652 and $1,109, respectively, and the fair value of plan assets of the defined benefit plan and the SERP were $7,359 and $0, respectively.
The following table provides the components of net periodic benefit cost for the plans fiscal years 2002, 2001 and 2000:
|
|
|
Pension Benefits |
|
|||||||
|
Amounts in ($000) |
|
2002 |
|
2001 |
|
2000 |
|
|||
|
Service cost |
|
$ |
307 |
|
$ |
260 |
|
$ |
298 |
|
|
Interest cost |
|
603 |
|
575 |
|
549 |
|
|||
|
Expected return on plan assets |
|
(620 |
) |
(684 |
) |
(690 |
) |
|||
|
Amortization of prior service cost |
|
57 |
|
71 |
|
71 |
|
|||
|
Actuarial loss |
|
42 |
|
— |
|
(22 |
) |
|||
|
Net periodic benefit cost |
|
$ |
389 |
|
$ |
222 |
|
$ |
206 |
|
39
The assumptions used in the measurement of the Company’s benefit obligation as of December 31 are shown in the following table:
|
|
|
Pension Benefits |
|
||||
|
|
|
2002 |
|
2001 |
|
2000 |
|
|
Weighted average assumptions as of December 31: |
|
|
|
|
|
|
|
|
Discount rate |
|
6.75 |
% |
7.00 |
% |
7.75 |
% |
|
Expected return on plan assets |
|
8.50 |
% |
8.50 |
% |
8.50 |
% |
|
Rate of compensation increase |
|
5.00 |
% |
5.00 |
% |
5.00 |
% |
Note 9. Income Taxes
The provision for income taxes for the years ended December 31, 2002, 2001 and 2000, is comprised of the following amounts:
|
|
|
2002 |
|
2001 |
|
2000 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|||
|
Federal |
|
$ |
2,148 |
|
$ |
2,317 |
|
$ |
951 |
|
|
State |
|
247 |
|
207 |
|
207 |
|
|||
|
Deferred |
|
(219 |
) |
(609 |
) |
453 |
|
|||
|
Total tax provision |
|
$ |
2,176 |
|
$ |
1,915 |
|
$ |
1,611 |
|
The components of the net deferred tax assets which are included in other assets, are as follows:
|
|
|
2002 |
|
2001 |
|
||
|
Deferred Tax Assets |
|
|
|
|
|
||
|
Allowance for loan losses and other real estate owned |
|
$ |
1,830 |
|
$ |
1,576 |
|
|
Depreciation |
|
886 |
|
869 |
|
||
|
Interest on non-accrual loans |
|
261 |
|
159 |
|
||
|
Deferred loan fees |
|
— |
|
1 |
|
||
|
Gross deferred tax assets |
|
2,977 |
|
2,605 |
|
||
|
|
|
|
|
|
|
||
|
Deferred Tax Liabilities |
|
|
|
|
|
||
|
Pension expense |
|
486 |
|
346 |
|
||
|
Discount accretion |
|
29 |
|
19 |
|
||
|
Securities available for sale |
|
596 |
|
227 |
|
||
|
Other |
|
154 |
|
151 |
|
||
|
Gross deferred tax liabilities |
|
1,265 |
|
743 |
|
||
|
Net deferred tax assets |
|
$ |
1,712 |
|
$ |
1,862 |
|
Management has determined that a valuation allowance is not required at December 31, 2002 and 2001.
The following table reconciles the statutory Federal income tax rate with the effective income tax as a percent of pretax income.
|
|
|
2002 |
|
2001 |
|
2000 |
|
|
Federal income tax as statutory rate |
|
35.00 |
% |
35.00 |
% |
35.00 |
% |
|
Reduction/increase in taxes resulting from |
|
|
|
|
|
|
|
|
Tax-exempt interest |
|
(3.10 |
) |
(2.63 |
) |
(3.70 |
) |
|
Graduated tax rate |
|
(1.00 |
) |
(1.00 |
) |
(1.00 |
) |
|
State tax |
|
2.54 |
|
2.53 |
|
3.00 |
|
|
Other, net |
|
0.84 |
|
1.57 |
|
1.50 |
|
|
Effective income tax rate |
|
34.28 |
% |
35.47 |
% |
34.80 |
% |
40
Note 10. Related Parties
The Subsidiary Bank has entered into transactions with its directors and their affiliates (related parties). The aggregate amount of loans to such related parties at December 31, 2002 and 2001, was $3,340 and $3,276, 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 2002, new loans and advances to such related parties amounted to $524 and repayments amounted to $460.
Note 11. Commitments, Contingencies and Credit Risk
Financial instruments with off-balance-sheet risk: The Subsidiary Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of their customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of these instruments reflect the extent of involvement a bank has in particular classes of financial instruments.
The Subsidiary Bank’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and standby and commercial letters of credit is represented by the contractual amount of those instruments. The Subsidiary Bank uses the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Subsidiary Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon an extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, marketable securities, inventory, property, plant, and equipment, and income-producing commercial properties and residential properties.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowings arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as involved in extending loan facilities to customers. The Bank holds collateral, which may include accounts receivables, inventory, property and equipment, income producing properties, supporting those commitments if deemed necessary. In the event, the customer does not perform in accordance with the terms of the agreement with the third party, the Bank would be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount shown in the summary below. If the commitment is funded the Bank would be entitled to seek recovery from the customer. At December 31, 2002 and 2001 no amounts have been recorded as liabilities for the Bank’s potential obligations under these guarantees.
|
|
|
Contract Amount |
|
||||
|
|
|
2002 |
|
2001 |
|
||
|
Off-balance sheet financial instruments |
|
|
|
|
|
||
|
Commitments to extend credit |
|
$ |
76,441 |
|
$ |
81,030 |
|
|
Commercial letters of credit |
|
1,312 |
|
2,321 |
|
||
41
The Company leases certain office facilities with non-related parties 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, 2002, are as follows:
|
2003 |
|
$ |
315 |
|
|
2004 |
|
198 |
|
|
|
2005 |
|
218 |
|
|
|
2006 |
|
228 |
|
|
|
2007 |
|
231 |
|
|
|
Thereafter |
|
952 |
|
|
|
Total minimum payments |
|
$ |
2,142 |
|
Total rent expense was $590, $510 and $466 as of December 31, 2002, 2001 and 2000, respectively.
Contingencies: In addition, the Company is defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial condition of the Company.
Concentrations of credit risk: In addition to financial instruments with off-balance-sheet risk, the Company, to a certain extent, is exposed to varying risks associated with concentrations of credit. Concentrations of credit risk generally exist if a number of counterparties are engaged in similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by economic or other conditions.
The Company conducts substantially all of its lending activities throughout northeastern Illinois and the greater Phoenix metropolitan area. As of December 31, 2002, loans to customers in Arizona were approximately $104 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, 2002, the Company’s loan portfolio included $32,683 of loans secured by aircraft. The Bank’s lending policies for aircraft loans require loans to be well collateralized and supported by cash flows. Collateral for aircraft loans includes all makes and models of general aviation manufactured piston driven aircraft. Credit losses arising from aircraft loans compare favorably with the Company’s credit loss experience on its loan portfolio as a whole.
The nature of the Bank’s business requires that it maintain amounts due from banks and federal funds sold which, at times, may exceed federally insured limits. Management monitors these correspondent relationships and the Bank has not experienced any losses in such accounts.
Note 12. Dividend Restrictions and Regulatory Capital Requirements
Bank regulations place restrictions upon the amount of dividends that can be paid to the Company by its Subsidiary Bank. The availability of dividends may be further limited because of the need to maintain capital ratios satisfactory to applicable regulatory agencies.
The Company and the Subsidiary Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can cause regulators to initiate certain mandatory - and possibly additional discretionary - action that, if undertaken could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions do not apply to bank holding companies.
42
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes the Company and the Bank meet all capital adequacy requirements to which they are subject to at December 31, 2002.
At December 31, 2002, both entities exceeded regulatory established minimums as defined for financial institutions. To be well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since December 31, 2002, that management believes have changed the Bank’s capital position.
The Company’s ratios are presented in the following table:
|
|
|
Actual |
|
For
capital |
|
To
be well |
|
|||||||||
|
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|||
|
As of December 31, 2002: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total Capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Consolidated |
|
$ |
36,205 |
|
11.9 |
% |
$ |
24,399 |
|
8.0 |
% |
Not applicable |
|
|||
|
Uptown National Bank |
|
39,277 |
|
12.9 |
% |
24,376 |
|
8.0 |
% |
$ |
30,469 |
|
10.0 |
% |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Tier 1 Capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Consolidated |
|
32,381 |
|
10.6 |
% |
12,200 |
|
4.0 |
% |
Not applicable |
|
|||||
|
Uptown National Bank |
|
35,458 |
|
11.6 |
% |
12,188 |
|
4.0 |
% |
18,281 |
|
6.0 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Leverage (Tier 1 to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Consolidated |
|
32,381 |
|
8.1 |
% |
16,080 |
|
4.0 |
% |
Not applicable |
|
|||||
|
Uptown National Bank |
|
35,458 |
|
8.9 |
% |
16,010 |
|
4.0 |
% |
20,012 |
|
5.0 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
As of December 31, 2001: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total Capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Consolidated |
|
$ |
32,605 |
|
10.2 |
% |
$ |
25,550 |
|
8.0 |
% |
Not applicable |
|
|||
|
Uptown National Bank |
|
35,689 |
|
11.2 |
% |
25,523 |
|
8.0 |
% |
$ |
31,904 |
|
10.0 |
% |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Tier 1 Capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Consolidated |
|
28,616 |
|
9.0 |
% |
12,775 |
|
4.0 |
% |
Not applicable |
|
|||||
|
Uptown National Bank |
|
31,700 |
|
9.9 |
% |
12,762 |
|
4.0 |
% |
19,143 |
|
6.0 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Leverage (Tier 1 to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Consolidated |
|
28,616 |
|
7.2 |
% |
15,973 |
|
4.0 |
% |
Not applicable |
|
|||||
|
Uptown National Bank |
|
31,700 |
|
7.9 |
% |
15,960 |
|
4.0 |
% |
19,950 |
|
5.0 |
% |
|||
Note 13. Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating its fair value of its financial instruments:
Cash and due from banks and federal funds sold: The carrying amounts reported in the balance sheet for cash and due from banks and federal funds sold approximate their fair values.
Securities available-for-sale: Fair values of securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Nonmarketable equity securities: No ready market exists for these securities and they have no quoted market value. These securities are redeemable at par; therefore, market value equals cost.
Mortgages held-for-sale: Fair values of mortgages held-for-sale are based on quoted market prices of similar loans sold on the secondary market.
Loans: The fair values of the loan portfolio are estimated based upon discounted cash flow analyses using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.
43
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 and note payable: The carrying amounts of borrowings under note payable, repurchase agreements and other short-term borrowings approximate their fair values. The carrying amounts of FHLB borrowings are based on the convertible advances rate at December 31, 2002.
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,
|
|
|
2002 |
|
2001 |
|
|||||||||
|
|
|
Carrying Amount |
|
Estimated Fair Value |
|
Carrying Amount |
|
Estimated Fair Value |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Financial Assets |
|
|
|
|
|
|
|
|
|
|||||
|
Cash and due from banks |
|
$ |
13,758 |
|
$ |
13,758 |
|
$ |
14,736 |
|
$ |
14,736 |
|
|
|
Federal funds sold |
|
40,500 |
|
40,500 |
|
— |
|
— |
|
|||||
|
Securities available-for-sale |
|
57,823 |
|
57,823 |
|
60,614 |
|
60,614 |
|
|||||
|
Nonmarketable equity securities |
|
1,891 |
|
1,891 |
|
1,818 |
|
1,818 |
|
|||||
|
Mortgages held-for-sale |
|
— |
|
— |
|
945 |
|
945 |
|
|||||
|
Loans, net of allowance for loan losses |
|
281,003 |
|
287,152 |
|
299,630 |
|
306,068 |
|
|||||
|
Accrued interest receivable |
|
1,445 |
|
1,445 |
|
1,991 |
|
1,991 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Financial Liabilities |
|
|
|
|
|
|
|
|
|
|||||
|
Deposits |
|
$ |
344,665 |
|
$ |
345,253 |
|
$ |
324,025 |
|
$ |
324,939 |
|
|
|
Borrowed funds and note payable |
|
25,494 |
|
30,876 |
|
32,380 |
|
32,645 |
|
|||||
|
Accrued interest payable |
|
1,013 |
|
1,013 |
|
1,473 |
|
1,473 |
|
|||||
44
Note 14. Upbancorp, Inc. - Parent Only
Financial Statements
The Parent Company’s condensed financial information, which follows, conforms with the accounting policies described in the preceding notes:
Statements of Condition
|
(Dollars in thousands, except share data) |
|
2002 |
|
2001 |
|
||
|
Assets |
|
|
|
|
|
||
|
Cash |
|
$ |
164 |
|
$ |
154 |
|
|
Investment in Subsidiary Bank |
|
36,758 |
|
32,440 |
|
||
|
Other |
|
286 |
|
331 |
|
||
|
Total assets |
|
$ |
37,208 |
|
$ |
32,925 |
|
|
|
|
|
|
|
|
||
|
Liabilities |
|
|
|
|
|
||
|
Note payable |
|
$ |
3,000 |
|
$ |
3,000 |
|
|
Other liabilities |
|
526 |
|
569 |
|
||
|
Total liabilities |
|
$ |
3,526 |
|
$ |
3,569 |
|
|
|
|
|
|
|
|
||
|
Shareholders’ equity |
|
|
|
|
|
||
|
Common stock - $1 par value |
|
$ |
1,000 |
|
$ |
1,000 |
|
|
Additional paid in capital |
|
4,500 |
|
4,500 |
|
||
|
Retained earnings |
|
30,326 |
|
26,588 |
|
||
|
Treasury stock |
|
(3,079 |
) |
(3,079 |
) |
||
|
Accumulated other comprehensive income, net |
|
935 |
|
347 |
|
||
|
Total shareholders’ equity |
|
33,682 |
|
29,356 |
|
||
|
Total liabilities and shareholders’ equity |
|
$ |
37,208 |
|
$ |
32,925 |
|
Statements of Income
|
(Dollars
in thousands, except share data) |
|
2002 |
|
2001 |
|
2000 |
|
|||
|
Income: |
|
|
|
|
|
|
|
|||
|
Dividends received from bank subsidiary |
|
$ |
900 |
|
$ |
900 |
|
$ |
650 |
|
|
Interest on short term investments |
|
3 |
|
8 |
|
6 |
|
|||
|
Total income |
|
903 |
|
908 |
|
656 |
|
|||
|
Expense: |
|
|
|
|
|
|
|
|||
|
Interest on note payable |
|
107 |
|
178 |
|
125 |
|
|||
|
Salaries and employee benefits |
|
411 |
|
458 |
|
434 |
|
|||
|
Other expense |
|
229 |
|
228 |
|
247 |
|
|||
|
Total expense |
|
747 |
|
864 |
|
806 |
|
|||
|
Income before income taxes and undistributed income of subsidiary |
|
156 |
|
44 |
|
(150 |
) |
|||
|
Income tax benefit |
|
285 |
|
331 |
|
313 |
|
|||
|
Income before undistributed income of subsidiary |
|
441 |
|
375 |
|
163 |
|
|||
|
Undistributed income of subsidiary |
|
3,731 |
|
3,108 |
|
2,858 |
|
|||
|
Net income |
|
$ |
4,172 |
|
$ |
3,483 |
|
$ |
3,021 |
|
45
Statements of Cash Flows
|
(Dollars
in thousands, except share data) |
|
2002 |
|
2001 |
|
2000 |
|
|||
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|||
|
Net income |
|
$ |
4,172 |
|
$ |
3,483 |
|
$ |
3,021 |
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|||
|
Equity in undistributed loss of subsidiary |
|
(3,731 |
) |
(3,108 |
) |
(2,858 |
) |
|||
|
Other, net |
|
3 |
|
45 |
|
21 |
|
|||
|
Net cash provided by (used in) operating activities |
|
444 |
|
420 |
|
184 |
|
|||
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|||
|
Capital contributed to Subsidiary Bank |
|
— |
|
— |
|
(2,650 |
) |
|||
|
Net cash (used in) investing activities |
|
— |
|
— |
|
(2,650 |
) |
|||
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|||
|
Cash dividends paid |
|
(434 |
) |
(435 |
) |
(435 |
) |
|||
|
Proceeds from note payable |
|
— |
|
— |
|
3,000 |
|
|||
|
Treasury stock purchased |
|
— |
|
— |
|
(59 |
) |
|||
|
Net cash provided by (used in) financing activities |
|
(434 |
) |
(435 |
) |
2,506 |
|
|||
|
Net increase (decrease) in cash |
|
10 |
|
(15 |
) |
40 |
|
|||
|
Cash at beginning of year |
|
154 |
|
169 |
|
129 |
|
|||
|
Cash at end of year |
|
$ |
164 |
|
$ |
154 |
|
$ |
169 |
|
46
Note 15. Unaudited Interim Financial Data
The following table reflects summarized quarterly data for the periods described, in thousands, except share data:
|
|
|
2002 |
|
||||||||||
|
|
|
December 31 |
|
September 30 |
|
June 30 |
|
March 31 |
|
||||
|
Interest income |
|
$ |
6,732 |
|
$ |
6,903 |
|
$ |
7,106 |
|
$ |
7,000 |
|
|
Interest expense |
|
1,721 |
|
1,771 |
|
1,946 |
|
1,973 |
|
||||
|
Net interest income |
|
5,011 |
|
5,132 |
|
5,160 |
|
5,027 |
|
||||
|
Provision for loan losses |
|
825 |
|
425 |
|
225 |
|
225 |
|
||||
|
Noninterest income |
|
442 |
|
488 |
|
459 |
|
476 |
|
||||
|
Noninterest expense |
|
3,374 |
|
3,602 |
|
3,539 |
|
3,632 |
|
||||
|
Income before income taxes |
|
1,254 |
|
1,593 |
|
1,855 |
|
1,646 |
|
||||
|
Income taxes |
|
399 |
|
522 |
|
658 |
|
597 |
|
||||
|
Net income |
|
$ |
855 |
|
$ |
1,071 |
|
$ |
1,197 |
|
$ |
1,049 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic earnings per share |
|
$ |
1.03 |
|
$ |
1.28 |
|
$ |
1.43 |
|
$ |
1.26 |
|
|
|
|
2001 |
|
||||||||||
|
|
|
December 31 |
|
September 30 |
|
June 30 |
|
March 31 |
|
||||
|
Interest income |
|
$ |
7,411 |
|
$ |
7,764 |
|
$ |
7,813 |
|
$ |
7,997 |
|
|
Interest expense |
|
2,520 |
|
3,166 |
|
3,697 |
|
3,990 |
|
||||
|
Net interest income |
|
4,891 |
|
4,598 |
|
4,116 |
|
4,007 |
|
||||
|
Provision for loan losses |
|
390 |
|
200 |
|
150 |
|
150 |
|
||||
|
Noninterest income |
|
600 |
|
726 |
|
474 |
|
811 |
|
||||
|
Noninterest expense |
|
3,221 |
|
3,437 |
|
3,614 |
|
3,663 |
|
||||
|
Income before income taxes |
|
1,880 |
|
1,687 |
|
826 |
|
1,005 |
|
||||
|
Income taxes |
|
684 |
|
594 |
|
279 |
|
358 |
|
||||
|
Net income |
|
$ |
1,196 |
|
$ |
1,093 |
|
$ |
547 |
|
$ |
647 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic earnings per share |
|
$ |
1.43 |
|
$ |
1.31 |
|
$ |
0.66 |
|
$ |
0.77 |
|
On February 14, 2003, Upbancorp, Inc., and Bridgeview Bancorp, Inc. (“Bridgeview”), and Bridgeview Acquisition Corp., a wholly owned subsidiary of Bridgeview (“MergerSub”), entered into an Agreement and Plan of Merger, pursuant to which MergerSub will be merged with and into Upbancorp. As a result of the merger, shareholders will receive approximately $67.90 in exchange for each share of common stock.
The merger is subject to approval by the shareholders of Upbancorp who own at least a majority of the issued and outstanding common stock of Upbancorp, receipt of certain regulatory approvals and other customary conditions set forth in the Agreement and Plan of Merger.
Pursuant to the Agreement and Plan of Merger, upon consummation of the merger, the certificate of incorporation of MergerSub shall be the certificate of incorporation of the surviving corporation, and the bylaws of MergerSub shall be the bylaws of the surviving corporation, until each is amended in accordance with law. The directors and officers of MergerSub will be the directors and officers of the surviving corporation.
The Agreement and Plan of Merger may be terminated by either Bridgeview or Upbancorp if the merger has not been consummated by August 1, 2003, provided the party seeking to terminate the Agreement and Plan of Merger is not then in material breach of the Agreement and Plan of Merger.
47
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 accounting principles generally accepted in the United States of America appropriate to the circumstances.
Management depends upon the Company’s system of internal controls in meeting its responsibilities for reliable financial statements. This system is designed to provide reasonable assurance that assets are safeguarded and that transactions are properly recorded and executed in accordance with Management’s authorization. Judgments are required to assess and balance the relative cost and the expected benefits of these controls. As an integral part of the system of internal controls, the Bank Subsidiary contracts with a professional staff of Independent Internal Auditors who conduct operational, financial, and special audits, and coordinate audit coverage with the Independent Auditors.
The consolidated financial statements have been audited by our Independent Auditors, McGladrey & Pullen LLP, who render an independent professional opinion on Management’s financial statements.
The Audit Committee of Upbancorp, Inc.’s Board of Directors, composed solely of outside directors, meets regularly with the Independent Internal Auditors, the Independent Auditors and Management to assess the scope of the annual examination plan and to discuss audit, internal control and financial reporting issues, including major changes in accounting policies and reporting practices. The Independent Internal Auditors and the Independent Auditors have free access to the Audit Committee, without Management present, to discuss the results of their audit work and their evaluations of the adequacy of internal controls and the quality of financial reporting.
Sincerely,
|
/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 |
|
48
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, 2002 and 2001, 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, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The audits include examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. The audits also include 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, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
|
|
/s/ McGladrey & Pullen, LLP |
|
|
|
|
Chicago, Illinois |
|
|
March 7, 2003 |
|
49
None.
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 2003 Annual Meeting of Shareholders of the Company, which is incorporated herein by reference.
Information regarding compensation of the Executive Officers of the Company is contained in the “Executive Compensation” section of the Proxy Statement for the 2003 Annual Meeting of Shareholders of the Company, which is incorporated herein by reference.
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 2003 Annual Meeting of Shareholders of the Company, which is incorporated herein by reference.
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 2003 Annual Meeting of Shareholders of the Company, which is incorporated herein by reference. Further information with respect to loans to the Directors and Executive Officers of the Company is provided in Note 10 in the Notes to Consolidated Financial Statements found in Item 8 of this Form 10-K.
(a) Evaluation of disclosure controls and procedures
Within 90 days prior to the filing day of this report (the “Evaluation Date”, Upbancorp carried out an evaluation under the supervision and with the participation of Upbancorp’s management including Upbancorp’s President and Chief Executive Officer and its Executive Vice President, Chief Financial Officer, and Principal Accounting Officer of the effectiveness of the design and operation of Upbancorp’s disclosure controls and procedures pursuant to Rule 13a-14 and 15d-14 of the Securities and Exchange Act of 1934 (the ‘Exchange Act”). Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, and Financial Accounting Officer concluded that as of the Evaluation Date, Upbancorp’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by Upbancorp in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified in Securities and Exchange Commission rules and forms.
(b) Changes in internal controls,
There were no significant changes in Upbancorp’s internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date nor were there any significant deficiencies or material weaknesses in Upbancorp’s internal controls.
50
(a) The following exhibits, financial statements and financial statement schedules are filed as part of this report:
Consolidated Statements of Condition - December 31, 2002 and 2001
Consolidated Statements of Income - Years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows - Years ended December 31, 2002, 2001 and 2000
Consolidated
Statements of Changes in Shareholders’ Equity - Years ended
December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
All schedules normally required by Form 10-K are omitted since they are either not applicable or the required information is shown in the financial statements or notes thereto.
EXHIBITS
|
(3) |
|
Amended Certificate of Incorporation is attached hereto as Exhibit A and by-laws (filed as an Exhibit to the Registrant’s Form S-14 Number 2-18746 filed with the Securities and Exchange Commission on February 8, 1983 and incorporated herein by reference). |
|
|
|
|
|
(10.1) |
|
Employment Agreement between Upbancorp, Inc. and Richard K. Ostrom (filed as an Exhibit to the Registrant’s 1999 Form 10-K and incorporated herein by reference). |
|
|
|
|
|
(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). |
|
|
|
|
|
(99.1) |
|
Section 906 Certifications |
|
|
|
|
|
(b) |
|
Reports on Form 8-K - No reports on Form 8-K were filed during the fourth quarter of 2002. |
51
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 7, 2003 |
|
UPBANCORP, INC. |
|
|
|
|
(The Registrant) |
|
|
|
|
|
|
|
|
|
/s/ Richard K. Ostrom |
|
|
|
|
Richard K. Ostrom |
|
|
|
|
Chairman of
the Board, |
|
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 7, 2003.
|
/s/ Richard K. Ostrom |
Chairman of the Board |
|
Richard K. Ostrom |
|
|
|
|
|
/s/ Stephen W. Edwards, CLU |
Director |
|
Stephen W. Edwards, CLU |
|
|
|
|
|
/s/ Delbert R. Ellis |
Director |
|
Delbert R. Ellis |
|
|
|
|
|
/s/ Alfred E. Hackbarth, Jr. |
Director |
|
Alfred E. Hackbarth, Jr. |
|
|
|
|
|
/s/ James E. Heraty |
Director |
|
James E. Heraty |
|
|
|
|
|
/s/ Marvin L. Kocian |
Director |
|
Marvin L. Kocian |
|
52
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION
1350,
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Richard K. Ostrom, Chairman of the Board, President and Chief Executive Officer, certify that:
1.) I have reviewed this annual report on Form 10-K of Upbancorp, Inc.;
2.) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.) Based on my knowledge, the financial statements and other financial information included in this annual report fairly present in all material respects the financial condition, results of operations and cash flow of the registrant as of and for the periods presented in this annual report;
4.) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Acts Rules 13a-14 and 15d-14) for the registrant and have:
a.) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b.) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c.) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.) The registrant’s other certifying officers and I have disclosed, based upon our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditor any material weaknesses in internal controls; and
b.) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.) The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|
March 7, 2003 |
|
|
|
|
|
/s/ Richard K. Ostrom |
|
|
Richard K. Ostrom |
|
|
|
Chairman of the Board, |
|
53
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION
1350,
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Kathleen L. Harris, Senior Vice President and Chief Financial Officer, certify that:
1.) I have reviewed this annual report on Form 10-K of Upbancorp, Inc.;
2.) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.) Based on my knowledge, the financial statements and other financial information included in this annual report fairly present in all material respects the financial condition, results of operations and cash flow of the registrant as of and for the periods presented in this annual report;
4.) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Acts Rules 13a-14 and 15d-14) for the registrant and have:
a.) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b.) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c.) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.) The registrant’s other certifying officers and I have disclosed, based upon our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditor any material weaknesses in internal controls; and
b.) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.) The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|
March 7, 2003 |
|
|
|
|
|
/s/ Kathleen L. Harris |
|
|
Kathleen L. Harris |
|
|
|
Senior Vice President and |
|
54