Same commitment. - Seaway Bank and Trust Company

Notes to Financial Statements
For the Years Ended December 31, 2008 and 2007
Note 1 — Summary of Significant Accounting and Reporting Policies
The financial reporting and accounting policies of Seaway Bancshares, Inc. (the
“Corporation”) and its subsidiary, Seaway Bank and Trust Company (the “Bank”),
conform to accounting principles generally accepted in the United States and to
general practices within the banking industry. The following is a summary of the
significant accounting policies.
NATURE OF OPERATIONS
Seaway Bancshares, Inc. is a bank holding company whose principal activity is
the ownership and management of its wholly-owned subsidiary Seaway Bank
and Trust Company. The Bank generates commercial, mortgage and consumer
loans and receives deposits from customers located primarily in Chicago, Illinois
and the surrounding area. On December 30, 2007, the Illinois Department of
Financial and Professional Regulation (IDFPR) approved the conversion of
Seaway National Bank of Chicago to a bank chartered by the State of Illinois.
IDFPR issued a charter to the converting bank under the name of Seaway Bank
and Trust Company. The Bank is subject to regulation by the Federal Deposit
Insurance Corporation.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Corporation and the Bank. All intercompany accounts and transactions have been
eliminated in the consolidated financial statements.
In accordance with Financial Accounting Standards Board Interpretation
No. 46, (R),“Consolidation of Variable Interest Entities” [“FIN 46 (R)”], the
accompanying consolidated financial statements do not include the accounts of
a wholly-owned financed subsidiary (the “Trust”). The Trust was formed for the
sole purpose of issuing Trust Preferred securities and, in turn, purchasing subordinated
debentures from the Corporation.
Under the provisions of FIN 46 (R), the Trust is considered a “Variable Interest
Entity” (“VIE”), which can only be consolidated if the Corporation is subject
to a majority of the risk of loss from the VIE activity or is entitled to receive a
majority of the entity’s residual returns. The design of the Trust, which is very
common in the banking industry, is such that the Corporation is neither subject
to the majority of risk of loss nor entitled to receive the majority of any residual
returns. As a result, the Trust is not consolidated.
The Corporation does, however, report the subordinated debentures sold to
the Trust as a liability in the Consolidated Balance Sheets and associated interest
expense in the Consolidated Statements of Income.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Classification Accounting Treatment
Held-to-Maturity Carried at Amortized Cost
Trading Securities Carried at fair value with unrealized holding
gains and losses included in earnings
Available-For-Sale Carried at fair value with unrealized holding gains
and losses excluded from earnings, and reported as a
separate component of Shareholders’ equity, net of tax,
as accumulated other comprehensive income
The decision to purchase securities is based on a current assessment of expected
economic conditions including the interest rate environment. The determination
to sell such securities is based on management’s assessment of changes in
economic or financial market conditions, interest rate risk and balance sheet and
liquidity positions. The adjusted cost of the specific security sold is the basis for
determining gains and losses.
LOANS
The Corporation’s loan portfolio includes residential and commercial mortgages
and commercial and consumer loan products. Loans are stated at unpaid
principal balances less the allowance for loan losses and net deferred loan fees and
unearned discounts. Unearned discount is recognized as income over the terms
of the loan by the sum-of-the-months digit method, the result of which is not
materially different from that obtained by using the interest method. Interest on
other loans is reported on the accrual basis throughout the terms of the loans.
Loans are placed on a non-accrual (cash) basis for recognition of interest
income when interest earned in excess of ninety days is delinquent or principal
is delinquent in excess of ninety days and the loan is either not well collateralized
or is in the process of collection. The non-recognition of interest does not
constitute forgiveness of the interest.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level that, in management’s judgment,
is adequate to provide for estimated probable losses from loans. The amount
of the allowance is based on management’s formal review and analysis of potential
losses, as well as prevailing economic conditions. The allowance is increased by
provisions for losses, which are charged to earnings and reduced by charge-offs,
net of recoveries.
The allowance consists of specific, general, and unallocated components. The
specific component relates to loans that are classified as doubtful, substandard, or
special mention. For such loans that are also classified as impaired, an allowance
is established when the discounted cash flows (or collateral value or observable
market price) of the impaired loan is lower than the carrying value of that loan.
The general component covers non-classified loans and is based on historical loss
experience adjusted for qualitative factors. An unallocated component is maintained
to cover uncertainties that could affect management’s estimate of probable
losses.
While management uses available information to recognize losses on loans,
further reduction in the carrying amounts of loans maybe necessary based on
changes in local economic conditions. It is reasonably possible that the estimated
losses on loans may change materially in the near term. However, the amount of
the change that is reasonably possible cannot be estimated.
IMPAIRMENT OF LOANS
Loans are considered impaired when it is probable that the total amount due,
including accrued interest, will not be collected according to the contracted
terms and schedules of the Loan Agreement. Income related to impaired loans is
recognized when earned, unless the loan has also been placed on a non-accrual
(cash) basis, for the recognition of interest income.
FEES RELATED TO LENDING ACTIVITIES
Loan origination fees and direct loan origination costs that are incurred on a
specific loan are offset against each other and the net amount is deferred and
recognized over the life of the loan as an adjustment of the loans’ yield. Commitment
fees and direct loan origination costs that are incurred to make a commitment
to originate a specific loan shall be offset against each other and only the
net amount is deferred and recognized over the life of the loan as an adjustment
of the loans’ yield.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation. Depreciation
is computed on the straight-line method over the estimated useful lives of
the related assets, ranging from 3 to 40 years.
INCOME TAXES
Prior to 2001 the Corporation filed a consolidated Federal Income Tax return.
Amounts provided for income taxes were based on income reported for financial
statement purposes. Provisions for deferred income taxes were made as a result of
timing differences between the period in which certain income and expenses are
recognized for financial reporting purposes and the period in which they affect
taxable income. The principal items causing these timing differences were the
provision for possible loan losses and depreciation. Effective January I, 2001, the
Corporation and the Bank jointly elected to be treated as an S Corporation for
federal income tax purposes. As an S Corporation, both the Corporation and the
Bank are liable for federal corporate level income taxes on certain “built-in gains”
existing at December 31, 2000, which are recognized after that date and any
applicable state corporate level income taxes, (including the Illinois Replacement
Tax). As a further consequence of the S Corporation election, both the Corporation
and the Bank were required to revalue deferred tax assets and liabilities at the
lower statutory tax rates applicable to S Corporations.
In June 2006, the Financial Accounting Standards Board (“FASB”) issued
FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in
Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”). FIN
48 prescribes a recognition threshold and measurement process for recording in
the financial statements uncertain tax positions taken or expected to be taken in a
tax return in accordance with SFAS No. 109 “Accounting for Income Taxes.” Tax
positions must meet a more-likely-than-not recognition threshold at the effective
date to be recognized upon the adoption of FIN 48 and in subsequent periods.
The accounting provision of FIN 48 was effective for the Corporation beginning
January 1, 2007. The impact of adoption on the Bank’s financial position and
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