** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC 20549**

**FORM 10-K**

 

**Annual Report pursuant to Section 13 or15(d) of the Securities Exchange Act of 1934.**

**For the fiscal year ended December 31, 2002.**

** **

**Commission file number 0-12292**

** **

**UPBANCORP, INC.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                                                                      |   | **36-3207297**                        |
|---------------------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                                   |   | (I.R.S. Employer  Identification No.) |
|                                                                                              |   |                                  |
| **4753 N. Broadway, Chicago, Illinois**                                                           |   | **60640**                             |
| (Address of principal executive  offices)                                                         |   | (Zip Code)                            |
| Registrant’s telephone number,  including area code**(773) 878-2000**                        |
|                                                                                              |   |                                  |
| Securities registered pursuant  to Section 12(b) of the Act: ** None**                       |
| Securities registered pursuant  to Section 12(g) of the Act:**  Common  Stock-$1 par value** |

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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 ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of the registrant’s knowledge,in definitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K. ý

 

Indicated by check mark whether theregistrant is an accelerated filer (as defined in Rule 12b-2 of the Act)

 

Yes   o    No   ý

 

The aggregatemarket value of the voting stock held by non-affiliates of the registrant as ofJune 28,2002 (based upon the closing price as of that date), was approximately$28,786,164.

 

The number of shares outstanding of theregistrant’s common stock, $1.00 par value, as of March 7, 2003, was 835,055.

 

DOCUMENTSINCORPORATED BY REFERENCE

 

Portions of the proxy statement for the 2003annual shareholders meeting are incorporated by reference into Part III of thisForm 10-K.

 

 

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**Upbancorp, Inc.**

** **

**Table of Contents**

 
| **PART I**                                                                                                             |
|------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                   |
| **Item 1:  Business**                                                                                             |
|                                                                                                                   |
| **Item 2:  Properties**                                                                                           |
|                                                                                                                   |
| **Item 3:  Legal Proceedings**                                                                                    |
|                                                                                                                   |
| **Item  4:  Submission of Matters to a Vote of  Security Holders**                                                |
|                                                                                                                   |
| **PART  II**                                                                                                      |
|                                                                                                                   |
| **Item  5:  Market for the Registrant’s Common  Equity and Related Stockholder Matters**                     |
|                                                                                                                   |
| **Item 6:  Selected Financial Data**                                                                              |
|                                                                                                                   |
| **Item  7:  Management’s Discussion and Analysis  of Financial Condition and Results of Operations**         |
|                                                                                                                   |
| **Item  7A:  Quantitative and Qualitative  Disclosures on Market Risk**                                           |
|                                                                                                                   |
| **Item  8:  Financial Statements and  Supplementary Data**                                                        |
|                                                                                                                   |
| **Item  9:  Changes in and Disagreements with  Accountants on Accounting and Financial Disclosures**              |
|                                                                                                                   |
| **PARTIII**                                                                                                            |
|                                                                                                                   |
| **Item  10:  Directors and Executive Officers  of the Registrant**                                                |
|                                                                                                                   |
| **Item 11:  Executive Compensation**                                                                              |
|                                                                                                                   |
| **Item  12:  Security Ownership of Certain  Beneficial Owners and Management   and Related Stockholders Matters** |
|                                                                                                                   |
| **Item  13:  Certain Relationships and Related  Transactions**                                                    |
|                                                                                                                   |
| **Item 14:  Controls and Procedures**                                                                             |
|                                                                                                                   |
| **PARTIV**                                                                                                             |
|                                                                                                                   |
| **Item 15:   Exhibits, Financial Statement Schedules and Reports on Form 8-K**                                    |

 

2

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**PART I**

# **ITEM 1:  BUSINESS**

 

**UPBANCORP, INC.**

 

Upbancorp,Inc. (“Upbancorp” or the “Company”), is a bank holding company organized in1983 under the laws of the State of Delaware. Upbancorp owns all of theoutstanding 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 themetropolitan 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 in2000.  Upbancorp does not engage in anyactivities other than providing administrative services and acting as a holdingcompany for Uptown.

 

The Company is a publicly traded bankingcompany with total assets of $407 million at year-end 2002 and its headquartersare in Chicago, Illinois. The majority of the operational responsibilities ofthe Subsidiary Bank rest with its Officers and Directors.

 

The Company and its Subsidiary Bank employedapproximately 137 full-time equivalent employees at December 31, 2002.

 

Based on the Company’s approach to decisionmaking, 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 theChicagoland area and metropolitan Phoenix area. Approximately 71% of itsdeposits are related to Uptown, with the remainder related to Heritage.

 

The Subsidiary Bank is engaged in the generalcommercial banking business in addition to offering a complete range of retailbanking services. Uptown conducts a general banking business which embraces allof the usual functions, both commercial and consumer, and which they maylawfully provide, including, but not limited to: the acceptance of deposits todemand, savings and time accounts and the servicing of such accounts;commercial, industrial, consumer and real estate lending; safe deposit boxoperations; and other banking services tailored for both commercial and retailclients.

 

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 ofUptown’s business in the Chicagoland area with the exception of four facilities,which are leased.

 

# **SUPERVISION AND REGULATION**

 

The Company and its Subsidiary Bank aresubject to regulation and supervision by various governmental regulatoryauthorities including, but not limited to, the Board of Governors of theFederal Reserve System (the “Federal Reserve Board”), the Office of theComptroller of the Currency (the “OCC”), the Federal Deposit InsuranceCorporation (the “FDIC”), the Securities and Exchange Commission (the “SEC”),the Internal Revenue Service and state taxing authorities. Financialinstitutions and their holding companies are extensively regulated underfederal and state law. The effect of such statutes, regulations and policiescan be significant and cannot be predicted with a high degree of certainty.

 

Federal and state laws and regulationsgenerally applicable to financial institutions, such as the Company and theSubsidiary 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 isintended primarily for the protection of the FDIC’s Bank Insurance Fund and thedepositors, rather than the shareholders of financial institutions.

 

The Company is subject to supervision andregulation by the Federal Reserve Board, under the Bank Holding Company Act of1956, as amended.

 

Uptownis chartered under the National Bank Act, as amended, and is subject to theexamination, supervision, reporting and enforcement requirements of the OCC, asthe chartering authority for national banks, and the FDIC as the administratorof the Bank Insurance Fund. Uptown is a member of the Federal Reserve System.

 

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The deposits of the Subsidiary Bank areinsured by the Bank Insurance Fund of the FDIC to the extent permitted by law.

 

TheCompany’s common stock is registered with the SEC under the Securities Act of1934, as amended. Consequently, the Company is subject to the information,proxy solicitation, insider trading and other restrictions and requirements ofthe SEC under such act.

 

The following references to material statutesand regulations affecting the Company and the Bank are brief summaries thereofand are qualified in their entirety by reference to such statutes andregulations.  Any change in applicablelaw or regulations may have a material effect on the business of the Companyand the Bank.

 

##### **Illinois Banking Law**

 

Illinois bank holding companies are permitted to acquirebanks and bank holding companies, and be acquired by bank holding companies,located in any state which authorizes such acquisitions under qualificationsand conditions which are not unduly restrictive, as determined by theCommissioner of Illinois, when compared to those imposed under Illinois law.

 

Under interstate banking legislation, adequatelycapitalized and managed bank holding companies are permitted to acquire controlof a bank in any state.  States,however, may prohibit acquisitions of banks that have not been in existence forat least five years.  The FederalReserve Board is prohibited from approving an application if the applicantcontrols more than 10 percent of the total amount of deposits of insureddepository institutions nationwide.  Inaddition, interstate acquisitions may also be subject to statewideconcentration limits.

 

The Federal Reserve Board would be prohibited fromapproving an application if, prior to consummation, the applicant controls anyinsured institution or branch in the home state of the target bank, and theapplicant, following consummation, would control 30 percent or more of thetotal amount of deposits of insured depository institutions in that state.  This legislation also provides that theprovisions on concentration limits do not affect the authority of any state tolimit the percentage of the total amount of deposits in the state which wouldbe held or controlled by any bank or bank holding company to the extent theapplication of this limitation does not discriminate against out-of-stateinstitutions.  States may also waive thestatewide concentration limit.  Thelegislation authorizes the Federal Reserve Board to approve an applicationwithout regard to the 30 percent statewide concentration limit, if the stateallows a greater percentage of total deposits to be so controlled, or theacquisition is approved by the state bank regulator and the standard on whichsuch approval is based does not have the effect of discriminating againstout-of-state institutions.

 

Interstate branching under the Interstate Banking andBranching 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 issubject to certain conditions including: adequate capitalization; adequatemanagement; Community Reinvestment Act compliance; deposit concentration limits(as set forth above); and compliance with federal and state antitrustlaws.  An interstate merger transactionmay involve the acquisition of a branch without the acquisition of the bankonly if the law of the state in which the branch is located permitsout-of-state banks to acquire a branch of a bank in that state withoutacquiring the bank.  Following theconsummation of an interstate transaction, the resulting bank may establishadditional branches at any location where any bank involved in the transactioncould have established a branch under applicable federal or state law, if suchbank had not been a party to the merger transaction.

 

Interstate branching is required to comply with hoststate community reinvestment, consumer protection, fair lending, and intrastatebranching laws, as if the branch were chartered by the host state.  All other laws of the host state apply tothe branch to the same extent as if the branch were a bank, the main officebeing located in the host state.

 

The interstate branching by merger provisions becameeffective on June 1, 1997, and allowed each state, prior to the effective date,the opportunity to “opt out, “ thereby prohibiting interstate branching withinthat state.  Of those states in whichthe Company’s banking subsidiaries are located (Illinois and Arizona), neitherhas adopted legislation to “opt out” of the interstate branchingprovisions.  Furthermore, pursuant tothe Branching Act, a bank is now able to add new branches in a state in whichit does not already have banking operations if such state enacts a law permittingsuch de novo branching.

 

The effects on the Company of the changes in interstatebanking and branching laws cannot be accurately predicted, but it is likelythere will be increased competition from national and regional banking firmsheadquartered outside of Illinois and Arizona.

 

The Illinois legislature has also considered the adoptionof legislation aimed at curbing what some legislators and consumer-orientedadvocacy groups consider to be predatory lending practices by some mortgagebrokers and

 

4

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other lenders active in the State of Illinois.  “Predatory” lending consists of fraudulentand deceptive sales practices that occur when borrowers are pressured intotaking out loans they do not need or cannot afford.

 

The Commissioner of Illinois has adopted predatorylending regulations.  These regulationsapply to “high cost” mortgages which are defined as mortgages which exceed aspecified interest rate or are assessed points in excess of a specified minimum.  Once any of these thresholds is reached, theregulations impose certain restrictions on the lender including obligating thelender to verify the borrower’s ability to repay the loan based on theborrower’s income and debt obligations; prohibiting deceptive refinancing knownas loan flipping where a lender refinances existing loans, charging additionalpoints and fees, without any financial benefit to the consumer; prohibiting thefinancing of a single premium credit insurance; prohibiting the financing ofpoints and fees in excess of 6% of the total loan; limiting the size andinterval of balloon payments; and limiting prepayment penalties that could becharged to consumers.  These regulationsalso require the lender to make certain disclosures to borrowers who areseeking high cost mortgages.  Theregulations apply to all state licensed financial institutions makingresidential loans in Illinois.  Theregulations also require lenders to file with the Commissioner of Illinoissemi-annual reports on mortgage loans, including information relating todefaults and foreclosures.

 

Inasmuch as neither the Company nor the Bank indulges insuch practices, it is unlikely that any legislation adopted in Illinois tocombat this perceived problem would have an impact on either the Company or theBank other than the creation of additional reporting requirements.

 

The Subsidiary Bank is subject to Sections 22(h), 23A and 23B of theFederal Reserve Act, which restrict financial transactions between banks andaffiliated companies. The statute limits credit transactions between a bank andits executive officers and its affiliates, prescribes terms and conditions forbank affiliate transactions deemed to be consistent with safe and sound bankingpractices, and restricts the types of collateral security permitted inconnection with a bank’s extension of credit to an affiliate.

 

**BankHolding Company Act of 1956, As Amended (the “Act”)**

 

A bank holding company is subject to regulation under theAct and is registered with the Federal Reserve Board under the Act.  A bank holding company is required by theAct to file an annual report of its operations and such additional informationas the Federal Reserve Board may require and is subject, along with itssubsidiaries, to examination by the Federal Reserve Board.  The Federal Reserve Board has jurisdictionto regulate the terms of certain debt issues of bank holding companiesincluding the authority to impose reserve requirements.

 

The Act currently prohibits a bank holding company, orany subsidiary thereof, other than the bank, from acquiring all orsubstantially all the assets of any bank located outside of Illinois or for abank holding company or any subsidiary from acquiring 5% or more of the votingshares of any bank located outside of Illinois unless such acquisition isspecifically authorized by the laws of the state in which the bank is locatedand the acquirer receives prior approval from the Federal Reserve Board.  The acquisition of 5% or more of the votingshares of any bank located in Illinois requires the prior approval of theFederal Reserve Board and is subject to state law limitations.

 

The Act also prohibits, with certain exceptions, a bankholding company from acquiring direct or indirect ownership or control of more than5% of the voting shares of any company which is not a bank and from engaging inany business other than that of banking, managing and controlling banks, orfurnishing services to banks and their subsidiaries, except that bank holdingcompanies may engage in, and may own shares of, companies engaged in businessesfound by the Federal Reserve Board to be “so closely related to banking...as tobe a proper incident thereto.”  Undercurrent regulations of the Federal Reserve Board, a bank holding company and itsnonbank subsidiaries are permitted, among other activities, to engage in suchbanking-related business ventures as sales and consumer finance, equipmentleasing, computer service bureau and software operations, mortgage banking andbrokerage, and sale and leaseback and other forms of real estate banking.  The Act does not place territorialrestrictions on the activities of a bank holding company or its nonbanksubsidiaries.

 

Federal law prohibits acquisition of “control” of a bankor bank holding company without prior notice to certain federal bankregulators.  “Control” is defined incertain cases as the acquisition of as little as 10% of the outstandingshares.  Furthermore, under certaincircumstances, a bank holding company may not be able to purchase its own stockwhere the gross consideration will equal 10% or more of the company’s net worthwithout obtaining approval of the Federal Reserve Board.

 

**Graham-Leach-BlileyAct 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 itsorigins 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 enterinto combinations

 

5

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that permit a single financial services organization tooffer customers a more complete array of financial products and services.  To further this goal, the GLB Act amendssection 4 of the Act providing a new regulatory framework for regulationthrough the financial holding company (“FHC”), which has as its umbrellaregulator the Federal Reserve Board. Functional regulation of the FHC’s separately regulated subsidiarieswill be conducted by its primary functional regulator.  Pursuant to the GLB Act, bank holdingcompanies, subsidiary depository institutions thereof and foreign bankselecting to qualify as a FHC must be “well managed,” “well capitalized” and atleast rated satisfactory under the Community Reinvestment Act in order for themto engage in new financial activities.

 

An FHC may engage in securities, insurance and otheractivities that are financial in nature or incidental to a financialactivity.  While aware of the flexibilityof the FHC statute the Company has, for the time being, decided not to convertto a FHC, but will continue to follow the reception given FHCs in themarketplace.  The activities of bankholding companies that are not FHCs will continue to be limited to activitiesunder the Act.

 

The GLB Act also prohibits a financial institution fromdisclosing non-public information about a consumer to nonaffiliated thirdparties unless the institution satisfies various disclosure and opt outrequirements and the consumer has not elected to opt out of thedisclosure.  Under the GLB Act, afinancial institution must provide its consumers with a notice of its privacypolicies and practices, and the Federal Reserve Board, the FDIC and otherfinancial regulatory agencies are authorized to issue regulations to implementnotice requirement and restrictions on a financial institution’s ability todisclose non-public personal information about consumers to nonaffiliated thirdparties.  Because the Company and theBank are not now engaged in selling or transferring non-public customerinformation to nonaffiliated third parties, it is anticipated that this burdenwill not result in material economic cost to the Company or the Bank.

 

The GLB Act provides a federal right to privacy fornon-public personal information of individual customers.  The Company and the Bank are also subject tocertain state laws that deal with the use and distribution of non-publicpersonal information.

 

The GLB Act is expected, in time, to alter the competitivelandscape of the product markets presently served by the Company.  Companies that are presently engagedprimarily in insurance activities or securities activities will be permitted toacquire banks and bank holding companies. The Company may, in the future, face increased competition from abroader range of larger, more diversified financial companies.

 

**USAPatriot Act**

 

On October 26, 2001, the President signed into law comprehensiveanti-terrorism legislation known as the USA Patriot Act. Title III of the USAPatriot Act requires financial institutions, including Upbancorp and theSubsidiary Bank, to help prevent, detect and prosecute international moneylaundering and the financing of terrorism. The Department of the Treasury hasadopted additional requirements to further implement Title III.

 

Under these regulations, a mechanism has been established for lawenforcement to communicate names of suspected terrorists and money launderersto financial institutions, in return for securing the ability to promptlylocate accounts and transactions involving those suspects. Financialinstitutions receiving names of suspects must search their account andtransaction records for potential matches and report positive results to theTreasurer’s Financial Crimes Enforcement Network (“FinCEN”). Each financialinstitution must designate a point of contact to receive information requests.These regulations outline how financial institutions can share informationconcerning suspected terrorist and money laundering activity with otherfinancial institutions under the protection from the statutory safe harbor fromliability, provided each financial institution notifies FinCEN of its intent toshare information.

 

The Department of the Treasury has also adopted regulations intended toprevent money laundering and terrorist financing****through correspondent accounts maintained by U.S. financialinstitutions on behalf of foreign banks. Financial institutions are required totake reasonable steps to ensure they are not providing banking servicesdirectly or indirectly to foreign shell banks.

 

Upbancorp and the Subsidiary Bank have augmented their systems andprocedures to accomplish compliance with these requirements. Upbancorp and theSubsidiary Bank believe****that thecost of compliance with Title III of the USA Patriot Act is not likely to bematerial to them.

 

**FDIC Insurance Premiums**

 

The Subsidiary Bank’s deposits are insured through the BIF which isadministered by the FDIC. As insurer, the FDIC imposes deposit insurancepremiums and is authorized to conduct examinations of, and to require reporting by,FDIC-insured institutions.  It also mayprohibit any FDIC-insured institution from engaging in any activity the FDICdetermines 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-basedsystem under which all insured depository institutions are placed into one ofnine categories and assessed insurance premiums on deposits based upon theirlevel of capital and supervisory evaluation. For 2003, the Subsidiary Bank will pay premium assessments on its BIFinsured deposits in order to service the interest on the Financing Corporation(“FICO’) bond obligations which were used to finance the cost of “thriftbailouts” in the 1980’s. The FICO assessment rates for the first semi-annualperiod of 2003 were set at $.0168 per $100 of insured deposits each for BIFassessable deposits. These rates may be adjusted quarterly to reflect changesin assessment basis for the BIF.

 

##### **Sarbanes-Oxley Act of 2002 - Public CompanyGovernance**

 

On July 30, 2002, the President signed the Sarbanes-Oxley Act of 2002(the “Sarbanes-Oxley Act”). This legislation impacts corporate governance of publiccompanies, 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 willbecome effective as the Securities and Exchange Commission (“SEC”) adoptsappropriate rules.

 

TheSarbanes-Oxley Act implements a broad range of corporate governance andaccounting measures for public companies designed to promote honesty andtransparency in corporate America and better protect investors from corporatewrongdoing. The Sarbanes-Oxley Act’s principal legislation includes:

 

•                  the creationof an independent accounting oversight board to oversee the audit of publiccompanies and auditors who perform such audits;

•                  auditorindependence provisions which restrict non-audit services that independentaccountants may provide to their audit clients;

•                  additionalcorporate governance and responsibility measures, including:  (i) requiring the chief executive officerand chief financial officer to certify financial statements; (ii) prohibitingtrading of securities by officers and directors during periods in which certainemployee benefit plans are prohibited from trading; (iii) requiring chiefexecutive officer and chief financial officer to forfeit salary and bonuses,including profits on the sale****ofcompany securities, in certain situations; and (iv) protecting whistleblowersand informants;

•                  expansion ofthe power of the audit committee, including the requirement that the auditcommittee: (i) have direct control of the independent auditor; (ii) be able tohire and fire the independent auditor; and (iii) approve all non-auditservices,

•                  expandeddisclosure requirements, including accelerated reporting of stock transactionsby insiders and the prohibition of most loans to directors and executiveofficers of non-financial institutions;

•                  mandatorydisclosure by analysts of potential conflicts of interest; and

•                  a rangeof enhanced penalties for fraud and other violations.

 

**GovernmentalMonetary Policies and Economic Conditions**

 

The earnings ofthe Company are affected in important respects by general economic conditionsand also by the fiscal and monetary policies of the federal government and itsagencies. In particular, the FRB regulates the national supply of bank creditin order to achieve, among other things, maximum employment and a stable pricelevel. Among the instruments of monetary policy used by the FRB to implementthese objectives are: open market transactions in United States governmentsecurities, changes in the discount rate on member bank borrowings and changesin reserve requirements against member bank deposits. These means are used invarying combinations to influence overall growth of bank loans, investments, anddeposits, and they may also affect interest rates charged on loans or paid fordeposits.

 

Interest ratesensitivity has a major impact on the yields earned on assets of the SubsidiaryBank. As market rates change, yields earned on assets may not necessarily moveto the same degree as rates paid on liabilities. For this reason, theSubsidiary Bank attempts to minimize earnings volatility related tofluctuations in interest rates through the use of formal asset/liabilitymanagement programs which identify imbalances between the repricing of earningassets and funding sources, among other things.

 

In addition tothe policy of the FRB, the Company’s earnings are also affected by the FDICinsurance premiums and the annual fees charged by the various regulatoryauthorities. The Company cannot fully predict the nature or the extent of anyeffect which such fiscal and monetary policies may have on its business andearnings.

 

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**Capital Guidelines**

 

The FRB, the OCCand the FDIC have risk-based capital guidelines which provide a framework forassessing the adequacy of the capital of banks and bank holding companies(collectively “banking institutions”). These guidelines apply to all bankinginstitutions regardless of size and are used in the examination and supervisoryprocess as well as in the analysis of applications to be acted upon by theregulatory authorities. These guidelines require banking institutions tomaintain capital based on the credit risk of their operations.

 

The risk-basedcapital guidelines are designed to require the maintenance of capitalcommensurate with both on and off-balance sheet credit risks. The minimumratios established by the guidelines are based on both Tier 1 and total capitalto total risk-based assets. In addition to the risk-based capital requirements,the FRB, the OCC and the FDIC require institutions to maintain a minimumleveraged-capital ratio to supplement the risk-based capital guidelines. Theleverage ratio is intended to ensure that adequate capital is maintainedagainst risks other than credit risk.

 

The Company andthe Subsidiary Bank exceeded the minimum required capital guidelines for bothrisk-based capital ratios and the leverage ratio at December 31, 2002. Afurther discussion of the capital guidelines is included in the CapitalResources section under Item 7 of this Form 10-K.

 

**DIVIDENDS**

 

**General**

 

In addition tothe capital guidelines provided in the discussion above, there are variousnational and state banking regulations which limit the ability of theSubsidiary Bank to pay dividends. This limits the ability of the Company to paydividends. Since the Company is a legal entity, separate and distinct from itsaffiliates, its dividends are not subject to such bank regulatory guidelines.The holders of the Company’s common stock are entitled to receive suchdividends as are declared by the Board of Directors. For a further discussionof dividends, see Note 12 “Dividend Restrictions and Regulatory CapitalRequirements” in the Notes to Consolidated Financial Statements included underItem 8 of this Form 10-K.

 

**National Banking Association Restrictions**

 

Uptown is anational banking association and is limited with respect to the amount ofdividends which it can pay to its shareholders under Sections 56 and 60 of theNational Bank Act.

 

Section 56restricts a national bank from paying dividends if it would impair theinstitution’s capital by barring any payments in excess of “net profits then onhand.” 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 capitalsurplus account may be included as “net profits then on hand” to the extent itrepresents earnings from prior periods.

 

Section 60 requiresthe OCC’s approval if the total of all dividends declared in any calendar yearwill exceed the institution’s net profits of that year combined with itsretained net profits of the preceding two years, less any required transfers tosurplus. In calculating its net profits under Section 60 a national bank maynot add back provisions made to its allowance for loan losses nor deduct netcharge-offs.

 

**COMPETITION**

 

The principalmethods of competition between commercial banks is generally expressed in termsof price, including interest rates paid on deposits and interest rates chargedon borrowings, fees charged on fiduciary services, quality of services tocustomers, 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 havealso resulted in intensified competition with traditional banking distributionsystems.

 

Both Illinois andArizona are highly competitive markets for banking and related financialservices. Since these areas are the Company’s primary focus markets, theSubsidiary Bank is exposed to varying types and levels of competition. Ingeneral, the Subsidiary Bank competes, anticipates and responds within eachindividual market area. Both Uptown and Heritage compete and rely heavily onthe high level of quality service provided to our customers. The Company hasseen the level of competition and number of competitors in its market placesincrease in recent years and expects a continuation of these competitive marketconditions.

 

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**ITEM 2: PROPERTIES**

 

The followingtable summarizes the Company and Subsidiary Bank’s properties by location:

 
| **Affiliate**   |   | **Property Type/Location** |   | **Ownership** |   | **Square Footage** |   |      |
|-----------------|--------|----------------------------|--------|---------------|--------|--------------------|--------|-----------|
|            |   |                       |   |          |   |               |   |      |
| **The Company** |   | 4753  N. Broadway          |   | —        |   | —             |   |      |
|            |   | Chicago,  Illinois         |   |          |   |               |   |      |
|            |   |                       |   |          |   |               |   |      |
| **Uptown**      |   | Main  Office (Illinois):   |   |          |   |               |   |      |
|            |   | Banking  Office:           |   |          |   |               |   |      |
|            |   | 4753  N. Broadway          |   | Owned         |   | 149,000            |   | (Note  1) |
|            |   | Chicago,  Illinois         |   |          |   |               |   |      |
|            |   |                       |   |          |   |               |   |      |
|            |   | Banking  Office:           |   |          |   |               |   |      |
|            |   | 6041  N. Clark Street      |   | Owned         |   | 2,100              |   | (Note  1) |
|            |   | Chicago,  Illinois         |   |          |   |               |   |      |
|            |   |                       |   |          |   |               |   |      |
|            |   | Banking  Office:           |   |          |   |               |   |      |
|            |   | 5345  N. Sheridan Road     |   | Leased        |   | 1,500              |   |      |
|            |   | Chicago,  Illinois         |   |          |   |               |   |      |
|            |   |                       |   |          |   |               |   |      |
|            |   | Banking  Office:           |   |          |   |               |   |      |
|            |   | 1058  W. Bryn Mawr Avenue  |   | Leased        |   | 1,500              |   |      |
|            |   | Chicago,  Illinois         |   |          |   |               |   |      |
|            |   |                       |   |          |   |               |   |      |
|            |   | Aircraft  Lending Office:  |   |          |   |               |   |      |
|            |   | 43  W 518 Route 30         |   | Leased        |   | 1,800              |   |      |
|            |   | Aurora  Municipal Airport  |   |          |   |               |   |      |
|            |   | Sugar  Grove, Illinois     |   |          |   |               |   |      |
|            |   |                       |   |          |   |               |   |      |
|            |   | Banking  Office:           |   |          |   |               |   |      |
|            |   | 4553-57  N. Lincoln Avenue |   | Leased        |   | 1,870              |   |      |
|            |   | Chicago,  Illinois         |   |          |   |               |   |      |
|            |   |                       |   |          |   |               |   |      |
|            |   | Main  Office (Arizona):    |   |          |   |               |   |      |
|            |   | 4222  E. Camelback Road    |   | Leased        |   | 4,100              |   |      |
|            |   | Suite  J200                |   |          |   |               |   |      |
|            |   | Phoenix,  Arizona          |   |          |   |               |   |      |
|            |   |                       |   |          |   |               |   |      |
|            |   | Banking  Office:           |   |          |   |               |   |      |
|            |   | 4222  E. Camelback Road    |   | Leased        |   | 4,100              |   |      |
|            |   | Suite  J100                |   |          |   |               |   |      |
|            |   | Phoenix,  Arizona          |   |          |   |               |   |      |
|            |   |                       |   |          |   |               |   |      |
|            |   | Banking  Office:           |   |          |   |               |   |      |
|            |   | 1333  W. Broadway          |   | Leased        |   | 4,700              |   |      |
|            |   | Tempe,  Arizona            |   |          |   |               |   |      |

 

In addition to the banking locations listedabove, the Subsidiary Bank owns 9 automatic teller machines, strategicallylocated within the Subsidiary’s market places.

 

At December 31, 2002, the properties and equipment of the Company hadan aggregate net book value of approximately $5.0 million.

----

Note 1:  These locations areowned by Uptown’s wholly-owned subsidiary, BCBC. Uptown utilizes approximately49,000 square feet for its main office and the rest of the facility is leasedout by BCBC to independent third parties.

 

9

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**ITEM3:  LEGAL PROCEEDINGS**

 

Neither theCompany nor its Subsidiary Bank are party to any litigation, which in thejudgment of management after consultation with counsel, would have a materialeffect on the financial position or results of operations of the Company or theSubsidiary Bank.

 

# **ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

There were noitems submitted to a vote of security holders during the fourth quarter of2002.

 

 

**P A R T  II**

# **ITEM 5: MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDERMATTERS**

 

The Company’s common stock is traded on theOver-The-Counter market under the symbol UPBN. As of December 31, 2002, therewere 267 shareholders of record. The following table sets forth common stockinformation during each quarter of 2002 and 2001.

 
|                              |   | **2002**   |   | **2001**  |   |
|-----------------------------------|--------|------------|--------|-----------|--------|
|                              |   | **Fourth** |   | **Third** |   | **Second** |   | **First** |   | **Fourth** |   | **Third** |   | **Second** |   | **First** |   |
| **Market Price of Common Stock:** |   |       |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 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 regulatoryrestrictions applicable to the Subsidiary Bank’s ability to pay dividends isincluded in the Dividends section under Item 1 of this Form 10-K and Note 12“Dividend Restrictions and Regulatory Capital Requirements” in the Notes toConsolidated Financial Statements included under Item 8 of this Form 10-K.

 

10

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**ITEM 6: SELECTED FINANCIAL DATA**

 

The followingSelected Financial Data is not covered by the report of independent publicaccountants and should be read in conjunction with the consolidated financialstatements and accompanying notes included under Item 8 of this Form 10-K. Amore detailed discussion and analysis of factors affecting the Company’sfinancial position and operating results is presented in Management’sDiscussion and Analysis of Financial Condition and Results of Operations foundunder Item 7 of this Form 10-K.

 

Consolidatedfinancial information reflecting a summary of the operating results andfinancial 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 | % |

 

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(1)           Interestincome and yields on non-taxable securities are reflected on a tax equivalentbasis based upon a Federal income tax rate of 35%.

 

11

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# **ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF** OPERATIONS

*(Dollars inthousands, except per share data)*

 

The following management’sdiscussion and analysis of financial condition and results of operations shouldbe read in conjunction with the Company’s Consolidated Financial Statements andNotes to Consolidated Financial Statements presented in Item 8 of this Form10-K as well as the Selected Financial Data presented in Item 6 of this Form10-K.

 

This discussionand analysis is intended to address significant factors affecting the Company’sconsolidated statements of condition and statements of income for the pastthree years. The discussion is designed to provide shareholders with acomprehensive review of the operating results and financial condition of theCompany.

 

**Summary**

 

The Company’sconsolidated net income for 2002 totaled $4,172 or $5.00 per share.  This is compared to net income and earningsper share of $3,483 or $4.17 per share and $3,021 or $3.61 per share for 2001and 2000, respectively. The results of 2002 represent a 19.78% improvement innet income from 2001 after a 15.29% increase in 2001 over 2000. The earningsimprovement in 2002 is mostly attributable to increased net interest incomewhile the 2001 improvement was attributable to increased net interest incomeand gain on the sale of investments.

 

The Company’sreturn on average shareholders’ equity for 2002 was 13.19% as compared to13.49% 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’sreturn on average assets from 2001 to 2002 is primarily the result of increasednet interest income.  The single largestfactor in the increase in net interest income was the roll-off/maturity of timedeposits that carried a significantly higher rate at issue in 2001 than iscurrently available for such deposits. The slight increase from 2000 to 2001 is the result of an increase inother income, primarily due to the gain on the sale of investments andincreased net interest income.

 

The Company’s increase in its asset growth rate is primarily the resultof an increase in the bank’s total deposits, the majority whichare reflected in federal funds sold balances.  Total loans decreased 5.93% in the currentyear.  This slight decrease in totalloans was primarily the result of the bank’s sale of aircraft related loanstotaling over $10 million throughout the year.

 

Nonperformingloans 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 atDecember 31, 2001 and 2000, respectively. The majority of this balance relates to ten loans, totaling $6,255, tothree borrowers being placed or remaining on nonaccrual status during the pastyear.  These loans have been analyzedand included in the Bank’s measurement process when reviewing the allowance forloan losses as performed on a quarterly or more frequent basis.  Subsequent to December 31, 2002, two ofthese loans in the amount of $2,508 paid off in full, thereby reducing nonperformingloan balances from $7,060  to $4,552.

 

The Company madea $425 contribution to the Pension Plan on December 31, 2002, to cure theestimated unfunded accumulated benefit obligation as determined by theactuaries to avoid a reduction in equity at the end of 2002.

 

#### **Subsequent Event**

 

On February 14, 2003, Upbancorp, Inc., and Bridgeview Bancorp, Inc.(“Bridgeview”), and Bridgeview Acquisition Corp., a wholly owned subsidiary ofBridgeview (“MergerSub”), entered into an Agreement and Plan of Merger, pursuantto which MergerSub will be merged with and into Upbancorp.  As a result of the merger, shareholders willreceive approximately $67.90 in exchange for each share of common stock.

 

The merger is subject to approval by the shareholders of Upbancorp whoown at least a majority of the issued and outstanding common stock ofUpbancorp, receipt of certain regulatory approvals and other customaryconditions set forth in the Agreement and Plan of Merger.

 

Pursuant to the Agreement and Plan of Merger, upon consummation of themerger, the certificate of incorporation of MergerSub shall be the certificateof incorporation of the surviving corporation, and the bylaws of MergerSubshall be the bylaws of the surviving corporation, until each is amended inaccordance with law.  The directors andofficers of MergerSub will be the directors and officers of the survivingcorporation.

 

12

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The Agreement and Plan of Merger may beterminated by either Bridgeview or Upbancorp if the merger has not beenconsummated by August 1, 2003, provided the party seeking to terminate theAgreement and Plan of Merger is not then in material breach of the Agreementand Plan of Merger.

 

**Net Interest Income**

 

Net interestincome, which is the difference between interest and fees earned on assets andthe interest paid on deposits and other funding sources, is the primary sourceof earnings for the Company. This component represents 92% of the Company’s netrevenues (net interest income/net interest income plus non-interest income) in2002. A detailed analysis highlighting the changes in net interest income isprovided in Table 1 and Table 2. Interest earned on tax-exempt loans andinvestments is adjusted for comparative purposes to a taxable equivalent basisusing the federal tax rate of 35%, resulting in a fully taxable equivalent(“FTE”) net interest income.

 

Net interestincome 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 2002includes an increase of $584 due to volume fluctuations following an increasedue to volume of $1,470 in 2001. Rate movements positively impacted netinterest income by $2,743 after negatively impacting net interest income by $839in 2001.

 

The 2002improvement in net interest income was primarily fueled by a significantdecrease in average other time deposits. Other average time deposits decreased $16,703 resulting in a positivenet interest income impact of $967. Average interest earning assets decreased by $5,116 or 1.36% and averageearning liabilities decreased $18,277 or 6.00%.  The majority of the volume decrease was the result of thedecrease in other time deposits being replaced in the current year by lowercost core deposits (see Table 7 for a definition of core deposits).

 

Net interest yieldrepresents net interest income as a percentage of total interest earningassets. The Company manages net interest income through investment decisions oninterest earning assets and monitoring interest rates its banking subsidiaryoffers, particularly rates for time deposits and short-term borrowings. TheCompany’s net interest margin measured on a fully taxable equivalent basisincreased to 5.54% in 2002 from 4.73% in 2001 and 5.07% in 2000.

 

13

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Table 1summarizes Upbancorp’s average earning assets and funding sources over the lastthree years. Additionally, the table shows interest income and expense relatedto each category of assets and funding sources and the yields earned and therates paid on such assets and funding sources.

 

**Table 1**

**Net Interest Incomeand Margin Analysis**

** **
|                                               |   | **2002**           |       | **2001**     |   | **2000**       |       |
|----------------------------------------------------|--------|--------------------|------------|--------------|--------|----------------|------------|
|                                               |   | **AverageBalance** |       | **Interest** |   | **Yield/Rate** |       | **AverageBalance** |   | **Interest** |   | **Yield/Rate** |   | **AverageBalance** |   | **Interest** |   | **Yield/Rate** |   |
| **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  &  Shareholders’ Equity:** |   |               |       |         |   |           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings, NOW and  money market deposits            |   | $                  | 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 nontaxablesecurities are reflected on a tax equivalent basis based upon a Federal incometax rate of 35% for 2002, 2001 and 2000.

 

(2)                                  The allowance for loan losses is not included aspart of this analysis.

 

(3)                                  Loan fees included in the above interest incomecomputations 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, deferredloan and commitment fee income, net of direct loan origination costs, totaled$528, $536 and $498, respectively.

 

14

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Table 2 analyzesthe changes in interest income, interest expense and net interest income thatresult from changes in volumes of earning assets and funding sources, as wellas fluctuations in interest rates. Changes noted in the volume/rate columnrepresent variances attributable jointly to changes in volume and rate.

 

**Table 2**

**Changes in NetInterest Income Applicable to Volumes and Interest Rates**

 
| **2002 Compared to 2001**               |   | **Interest  Income/Expense** |   | **Increase/(Decrease)  due to:** |   |
|-----------------------------------------|--------|------------------------------|--------|----------------------------------|--------|
|                                    |   | **2002**                     |   | **2001**                         |   | **Increase  (Decrease)** |   | **Volume** |   | **Rate** |   | **Volume/  Rate** |   |
|                                    |   |                         |   |                             |   |   |   |   |   |   |   |   |   |
| 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  (Decrease)** |   | **Volume** |   | **Rate** |   | **Volume/  Rate** |   |
|                                    |   |                                  |   |                             |   |   |   |   |   |   |   |   |   |
| 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 | ) |

 

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(1)                                  Interest income and yields on nontaxablesecurities are reflected on a tax equivalent basis based upon a Federal incometax rate of 35% for 2002, 2001 and 2000.

 

**Funds Management Analysis and Interest RateSensitivity**

 

The earning assetportfolio of the Subsidiary Bank is typically the leading determinate ofperformance. This is because the largest percentage of total income isattributable to net interest income. The policies and practices for managing liquidityrisk and interest rate risk are set by the Subsidiary Bank’s Funds ManagementCommittee (“FMC”) whose goal is to ensure maximum returns within safe and soundrisk parameters. The FMC monitors exposure in view of market developments andthe Subsidiary Bank’s financial condition, sets guidance for interest rate riskmanagement decisions, ensures consistency in the measurement of risk andmonitors liquidity and capital adequacy. In this capacity, the FMC placeslimits on the level of investments in various assets and off-balance sheetinstruments, as well as on the funding levels for loans and deposits. Inaddition, the FMC establishes pricing policies for the Subsidiary Bank’sproducts and services.

 

15

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Interest raterisk is the degree to which market interest rate fluctuations can effect netinterest income. The Company not only responds to this interest rate risk, butalso tries to anticipate and build strategies based on the current interestrate and maturity characteristics of the various balance sheet categories ofassets and liabilities. This is done through a formalized funds managementprocess and while there are several ways in which to analyze interest raterisk, the traditional method is called a “gap” analysis. A gap analysis is astatic management tool used to identify mismatches or gaps in the repricing ofassets and liabilities within specified periods of time.

 

The Company’s gapanalysis as of December 31, 2002, is presented in Table 3. Earning assets andinterest bearing liabilities are presented within selected time intervals basedupon their repricing and maturity characteristics. In a perfectly matched gapanalysis, an equal amount of rate sensitive assets and liabilities would bereflected as repricing within each given time interval. A positive interestrate sensitivity gap indicates more assets than liabilities will reprice inthat time period, while a negative gap indicates more liabilities will reprice.Generally, a positive gap position, or asset sensitive position, has afavorable impact on net interest income in periods of rising interest rates.Conversely, a negative gap would generally imply a favorable impact on netinterest income in periods of declining interest rates.

 

**Table 3**

**Remaining Maturity orEarliest Possible Pricing**

 
|                                                                           |   | **Up to  3  Months** |   | **3-12  Months** |   | **1-3  Years** |   | **3-5  Years** |     | **Greater  than  5 Years** |   | **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                       | %      |      |   |

 

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(1) Deferred loan fees, allowance for loanlosses and nonaccrual loans are not included as a part of this analysis.

 

16

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Table 3 shows theunder-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 positionat December 31, 2001 of $(131,629) (36.45% of total earning assets). Asignificant under-one-year net liability position would indicate the Company’snet interest income is exposed to rising short-term interest rates, while asignificant net asset position would mean an exposure to declining short-terminterest rates. Currently, the Company is focusing on a variety of methods tobetter match its under-one-year repricing mix. Upbancorp and Uptown follow a policy of maintaining a relativelybalanced mix of rate-sensitive assets and liabilities, making each side of thebalance sheet equally flexible in reacting to changes in market interest ratesso net interest income will not be materially affected in periods of rising orfalling interest rates.

 

The following table shows the Company’savailable-for-sale investment securities’ maturity distribution andcorresponding tax-equivalent yields at December 31, 2002:

 

**Table 4**

**SecuritiesAvailable-for-Sale**

**Maturity Distributionand Portfolio Yields**

 
|                               |   | **One year  or less** |   | **One year  to five years** |   | **Five years  to ten years** |   | **After  ten years** |   |
|------------------------------------|--------|-----------------------|--------|-----------------------------|--------|------------------------------|--------|----------------------|--------|
|                               |   | **Amortized  Cost**   |   | **Yield  (%)**              |   | **Amortized  Cost**          |   | **Yield  (%)**       |   | **Amortized  Cost** |   | **Yield  (%)** |   | **Amortized  Cost** |   | **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 followingtable 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

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The commercialloan maturities and sensitivity to changes in interest rates at December 31,2002, are shown in the following table:

 

**Table 6**

**Commercial LoanMaturities and Sensitivities to Changes in Interest Rates**

 
|                                     |   | **In one  year  or less** |    | **After one  through  five years** |   | **Over  five years** |   | **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 |   |

 

**LiquidityManagement**

 

A key element ofthe FMC process is the management of liquidity. Liquid funds are needed by theSubsidiary Bank to meet the needs of its depositors, borrowers and forregulatory requirements. Liquid funds, however, generally have very lowearnings potential and thus careful control of the Subsidiary Bank’s liquidityposition is needed. Monitoring of this liquidity position is done daily toensure constant adequacy and to maintain optimal levels of liquidity on thebalance sheet. Another source of liquidity is off balance sheet, in the form ofpre-approved loan commitments from the Federal Home Loan Bank and variouscorrespondent banks. For a further review of the Company’s sources and uses offunds, see the Consolidated Statements of Cash Flows found in Item 8 of thisForm 10-K.

 

The Company’s cash flows are composed of three classifications: cashflows from operating activities, cash flows from investing activities, and cashflows 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 investmentfunding was $(19,752) and $6,616 for the years ended December 31, 2002 and2001, respectively. A significant portion of the fluctuations in cash providedby (used in) investing activities was the increase in federal funds balancespartially offset by the reduction in loans during the year.  Net cash provided by and (used in) financingactivities, consisting of deposit fluctuations and increased borrowed funds andnote payable, was $13,320 and $(10,427) for the years ended December 31, 2002and 2001, respectively.

 

The Companyrequires adequate liquidity to pay its expenses and pay shareholder dividends.Liquidity is provided to the Company from the Subsidiary Bank in the form ofdividends. Other liquidity is provided by cash balances in banks, maturinginvestments and interest on investments. For a discussion of dividend payments,please see Note 12 in the Notes to Consolidated Financial Statements found inItem 8 of this Form 10-K. One method of analyzing the Company’s liquidityposition is through a careful review of available funding sources. Thefollowing table provides information as it pertains to funding sources andreflects a year-to-year comparison of the sources of the Company’s liabilityfunding 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

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Total funding sourcesincreased 3.86% at December 31, 2002 from prior year levels. Core depositsincreased 2.08% from December 31, 2001 balances while other time deposits $100or more increased at a 30.97% rate. A recap of other time deposits $100 andmore is presented in the following table. For a review of total other timedeposit maturities, see Note 6 in the Notes to Consolidated FinancialStatements found in Item 8 of this Form 10-K. A recap of borrowed funds and notes payable can be found in Note 7 inthe Notes to Consolidated Financial Statements found in Item 8 of this Form10-K.

 

**Table 8**

**Remaining Maturity ofOther 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 |   |

 

Borrowingfacilities are available to the Subsidiary Bank through various correspondentbanks in the amount of $29,000. These lines are established for the purpose ofborrowing 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 acorrespondent bank at December 31, 2002. This note had an outstanding balance of $3 million. Interest iscalculated on the basis of 3-month LIBOR plus 150 basis points (2.90% atDecember 31, 2002) with interest due and payable quarterly. The expiration dateof the line is March 1, 2003. The note also contains certain covenants whichlimit changes in capital structure, the purchase of or merger with other banksand/or businesses, and the guarantees of other liabilities and obligations. Inaddition, the Company must meet certain financial ratios.  Subsequent to December 31,2002, the note payable was renewed under the same terms and conditions with anexpiration date of March 1, 2004.

 

The followingtable summarizes our significant contractual obligations and other potentialfunding needs at December 31, 2002.

 
|                         |   | **Time  Deposits** |    | **Borrowed  Funds &  Note  Payable** |   | **Operating  Leases** |   | **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 capitalstructure is vital for many reasons, one of which is to allow the Company theopportunity for future growth. Upbancorp has developed a policy to manage itscapital and that of its Subsidiary Bank in accordance with regulatoryguidelines and to ensure appropriate use of this resource. The Company’scapital policy requires the Company and its Subsidiary Bank maintain a capitalratio in excess of the minimum regulatory guidelines. At December 31, 2002,both entities exceeded regulatory established minimums as defined for financialinstitutions. Please see Note 12 in the Notes to Consolidated FinancialStatements included under Item 8 of this Form 10-K.

 

Totalshareholders equity increased 14.74% to $33,682 at December 31, 2002. Totalequity as a percentage of assets was 8.27% at the end of 2002 versus 7.54% ayear earlier. Included in shareholders equity is the net unrealized gain onsecurities classified as available-for-sale, which amounted to $935 at the endof 2002 compared to a $347 unrealized gain at the end of 2001.

 

19

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**Provision and Allowance for Loan Losses**

 

The allowance forloan losses is established through a provision for loan losses charged toexpense. Loans are charged against the allowance for loan losses whenmanagement believes the full collection of the loan principal is unlikely. Thelevel of the provision for loan losses charged to operating expense as well asthe balances maintained in the allowance for loan losses is dependent upon manyfactors, including loan growth, changes in the composition of the loanportfolio, net charge-off levels, delinquencies, collateral values and management’sassessment of current and prospective economic conditions in the Company’sprimary market areas.

 

We maintain our allowance for loan losses ata level management believes will be adequate to absorb probable losses onexisting loans based on an evaluation of the collectibility of loans and priorloss experience. We use a risk rating system to evaluate the adequacy of theallowance for loan losses. With this system, each loan is risk rated betweenone and eight, by the originating loan officer or loan committee, with onebeing the best case and eight being a loss or the worst case. Loan loss reservefactors are multiplied against the balances in each risk-rating category todetermine an appropriate level for the allowance for loan losses. Loans with riskratings between five and eight are monitored much closer by the officers, aswell as our loan committee. Control of our loan quality is continuallymonitored by our management and our loan committee on a monthly basis.  This is also reviewed and monitored by ourboard of directors on a quarterly basis and is continually subjected tooversight by our board of directors through its members who serve on the loancommittee.  We consistently apply ourmethodology for determining the adequacy of the allowance for loan losses, butmay make adjustments to our methodologies and assumptions based on historicalinformation related to charge-offs and management’s evaluation of the currentloan portfolio.

 

Uptown’s determination as to theclassification of its assets and the amount of its valuation allowances issubject to review by their primary regulators, who can order the establishmentof additional general or specific loss allowances, as well as external loanreviewers, who review the classifications of Uptown’s loan portfolio.  The OCC, in conjunction with the otherfederal banking agencies, has adopted an interagency policy statement on theallowance for loan losses.  The policystatement provides guidance for financial institutions on both theresponsibilities of management for the assessment and establishment of adequateallowances and guidance for banking agency examiners to use in determining theadequacy of general valuation guidelines. Generally, the policy statement recommends that (i) institutions haveeffective systems and controls to identify, monitor and address asset qualityproblems; (ii) management has analyzed all significant factors that affectcollectibility of the portfolio in a reasonable manner; and (iii) managementhas established acceptable allowance evaluation processes that meet theobjectives set forth in the policy statement. Management believes it has established an adequate allowance for loanlosses.  Uptown analyzes its processregularly, with modifications made if needed, and reports those resultsquarterly at the Company’s Board of Directors meetings.  However, there can be no assurance that theregulators, in reviewing Uptown’s loan portfolio, will not request Uptown tomaterially increase its allowance for loan losses at the time.  Although management believes adequatespecific and general loan loss allowances have been established, actual lossesare dependent upon future events and as such, further additions to the level ofspecific and general loss allowances may become necessary.

 

The allowance forloan losses is comprised of both allocated and unallocated allowances in orderto quantify future loss potential. The allocated position representsmanagement’s assessment as to potential loss exposure for non-classifiedcredits based on including but not limited to historical loss experience, trendin delinquencies, concentration of volume, management and economic conditionsand independent assessment of individual credits which have been classified bymanagement. The unallocated portion of the allowance reflects management’sestimate of probable inherent but undetected losses within the portfolio due touncertainties in economic conditions, delays in obtaining information,including unfavorable information about a borrower’s financial condition, thedifficulty in identifying triggering events that correlate perfectly tosubsequent loss rates, and risk factors that have not yet manifested themselvesin loss allocation factors.  Inaddition, the unallocated allowance includes a component that explicitlyaccounts for the inherent imprecision in the allowance for loan losscalculation.  At December 31, 2002, theallowance for loan losses was comprised of $4,024 and $686 of allocated andunallocated reserves, respectively.

 

20

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**Table 9**

**Analysis of theAllowance 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 thistable, 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 inpart to the increase in the amount of loans charged off during the year 2002 ascompared to 2001. Charged off loans during 2002 totaled $1,163, an increasefrom 2001 of $553.

 

The allowance forloan losses amounted to $4,710 for 2002 compared to $4,098 for 2001 and $3,817for 2000. Allowance levels are the result of the Company’s analysis of probableloan losses and the adequacy level as defined by management’s internalanalysis.

 

21

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**NonperformingAssets**

 

One measurement used by management in assessing the risk inherent inthe loan portfolio is the level of nonperforming assets. Nonperforming assetsconsist of nonaccrual loans, restructured loans, investments, other assetsowned and other real estate owned. Nonaccrual loans are those loans which havebeen determined to have reasonable doubt as to the timely collectibility ofinterest or principal. Restructured loans are those loans whose terms orconditions have been changed and have resulted in a negative impact on the Bankcompared to the original terms.  Otherassets owned include property which the subsidiary bank has obtained insatisfaction of a debt.  Other realestate owned (“OREO”) represents real property which has been acquired throughforeclosure or real estate which a Subsidiary Bank has obtained possession ofin satisfaction of a debt. OREO and other assets owned are carried at the lowerof the recorded investment value of the loan or the estimated fair marketvalue, less estimated disposal costs, of the related real estate or otherassets. Past due loans are loans whose principal and interest payments aredelinquent 90 days or more and are still accruing interest.

 

The following table summarizes nonperforming assets and past due loansfor the past five years as well as certain information related to interestincome on nonaccrual loans:

 

**Table10**

**Analysisof 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 theystill remain at very low levels as a percentage of total assets and totalloans. This is a result of adherence to a strong credit culture and theeffectiveness of the Subsidiary Bank’s loan administration and workoutprocedures. As shown in Table 10, at December 31, 2002, nonperforming assetstotaled $7,846 compared to $5,091 in 2001. The percentage of nonperformingassets 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 tothree borrowers, secured primarily by real estate, totaling $6,255 being placedor remaining on nonaccrual status during the past year.  These loans have been analyzed and includedin the Bank’s measurement process when reviewing the allowance for loan lossesas performed on a quarterly or more frequent basis.  Subsequent to December 31, 2002, two of these loans in the amountof $2,508 paid off in full, thereby reducing the $6,255 to $3,747.

 

We utilized an internal classification system as a means to reportproblem and potential problem loans. The watch list of problem and potential problem loans include “SpecialMention,” “Substandard,” “Doubtful,” and “Loss.”  An asset is classified as Special Mention if it is currentlyprotected, but potential problems need attention and correction before paymentis undermined.  An asset classified asSubstandard has well-defined credit weaknesses that jeopardize the liquidationof the debt.  Substandard assets arecharacterized by the distinct possibility the bank may sustain some loss if thedeficiencies are not covered.  Assetsclassified as Doubtful have well-defined weaknesses with eventual liquidationin full highly questionable.  Assetsclassified as Loss are viewed uncollectible within a reasonable amount oftime.  All assets classified as Losshave been charged off.  Loans in thiscategory generally include loans that are classified for regulatorypurposes.  The aggregate principalamount of potential problem loans as of December 31, 2002 and 2001, wasapproximately $15.5 million and $10 million, respectively.  The increase is comprised primarily of threecredits totaling $6.2 million.

 

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**NoninterestIncome**

 

Noninterest income consists primarily of service charges on customerdeposit accounts. Total noninterest income decreased 28.57% to $1,865.Noninterest income decreased in 2002 from 2001 primarily due to the sale ofConcord EFS stock in 2001.  Thefollowing table analyzes the various sources of noninterest income for the yearsended December 31, 2000 through 2002.

 

**Table11**

**NoninterestIncome 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 ofnoninterest income, consists of fees on both interest bearing and noninterestbearing deposit accounts and charges for items such as insufficient funds,overdrafts and stop payment requests. These charges decreased 7.83% in 2002over 2001 levels.  This decrease isprimarily the result of a reduction in volume of overdraft activity within thecompany’s commercial portfolio, as well as the closure of one service chargeproducing ATM machine.

 

**Noninterest Expense**

 

Total noninterest expense increased slightly by $212 or 1.52% in 2002after decreasing $8 or .06% in 2001.

 

A key indicator of a bank’s ability to maintain low overhead whilegenerating net income is the bank’s efficiency ratio. A lower ratio indicates abank’s ability to maintain a lower cost operation in comparison to theresulting income produced. The Company’s efficiency ratio continues to improve;for the year ended December 31, 2002, the Company had a 64% efficiency ratio ascompared to 69% for the prior year’s period. The following table analyzes thevarious components of noninterest expense for the years ended December 31, 2000through 2002.

 

**Table12**

**NoninterestExpense 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  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 |   |

 

Total noninterest expense other than salaries and employee benefitsdecreased $42 from 2001 to 2002.  Themarginal decrease is the result of slightly higher outside fees and servicesand data processing expenses offset by lower advertising and businessdevelopment and other operating expenses.

 

23

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Management continues to focus on cost containment and this control ofexpenses remains a priority as a part of our broader goal of maximizinglong-term profitability.

 

**Forward Looking Statements**

 

Upbancorp andits representatives may from time to time make written or oral statements thatare “forward-looking” and provide other than historical information, includingstatements contained in the Form 10-K, Upbancorp’s other filings with theSecurities and Exchange Commission or in communications to itsshareholders.  These statements involveknown and unknown risks, uncertainties and other factors that may cause actualresults to be materially different from any results, levels of activity,performance or achievements expressed or implied by any forward-looking****statement. These factors include, amongother 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 SecuritiesLitigation Reform Act of 1995, including the negative of those words andphrases. These forward-looking statements are based on management’s currentviews and assumptions regarding future events, future business conditions andthe outlook for the Company based on currently available information. Theseforward-looking statements are subject to certain risks and uncertainties thatcould cause actual results to differ materially from those expressed in, orimplied by, these statements. Upbancorp wishes to caution readers not to placeundue reliance on any such forward-looking statements, which speak only as ofthe date made.

 

In connectionwith the safe harbor provisions of the Private Securities Litigation Reform Actof 1995, Upbancorp is hereby identifying important factors that could affectUpbancorp’s financial performance and could cause Upbancorp’s actual resultsfor future periods to differ materially from any opinions or statementsexpressed with respect to future periods in any current statements.

 

Among thefactors that could leave an impact on Upbancorp’s ability to achieve operatingresults and growth plan goals are,

 

•                       Management’sability to reduce and effectively manage interest rate risk and the impact ofinterest rates in general on the volatility of the Company’s net interestincome;

 

•        Fluctuations in the value of Upbancorp’sinvestment securities;

 

•        The ability to attract and retain seniormanagement experienced in banking and financial services;

 

•                       Thesufficiency of allowances for possible loan losses to absorb the amount ofactual future losses inherent in the existing portfolio of loans;

 

•        Upbancorp’s ability to adaptsuccessfully to technological changes to compete effectively in themarketplace;

 

•                       Creditrisks and risks from concentrations (by geographic area and by industry) withinthe Subsidiary Bank’s loan portfolio;

 

•                       The effectsof 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 financialinstitutions operating in Upbancorp’s market or elsewhere providing similarservices;

 

•                       The failureof assumptions underlying the establishment of reserves for loan losses andestimations of values of collateral and various financial assets andliabilities,

 

•        Volatility of rate sensitive deposits;

 

•        Operational risks, including dataprocessing system failures or fraud;

 

•        Asset/liability matching risks andliquidity risks;

 

•                       Changes inthe economic environment, competition or other factors that may influence theanticipated growth rate of loans and deposits, the quality of the loanportfolio and loan and deposit pricing and Upbancorp’s ability to successfullypursue acquisition and expansion strategies;

 

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•        The impact from liabilities arising fromlegal or administrative proceedings the financial condition of Upbancorp;

 

•                       Governmentalmonetary and fiscal policies, as well as legislative and regulatory changes,that may result in the imposition of costs and constraints on Upbancorp throughhigher FDIC insurance premiums, significant fluctuations in market interestrates and operational limitations;

 

•                       Changes ingeneral economic or industry conditions, nationally or in the communities inwhich Upbancorp conducts business;

 

•                       Changes inaccounting principles, policies or guidelines affecting the businesses conductedby Upbancorp or the Bank Subsidiary;

 

•        Acts of war or terrorism; and

 

•                       Othereconomic, competitive, governmental, regulatory and technical factors affectingUpbancorp’s operations, products, services, and prices.

 

Upbancorpwishes to caution that the foregoing list of important factors may not beall-inclusive and specifically declines to undertake any obligation to publiclyrevise any forward-looking statements that have been made to reflect events orcircumstances after the date of such statements or to reflect the occurrence ofanticipated or unanticipated events.

 

With respectto forward-looking statements set forth in the notes to consolidated financialstatements, including those relating to contingent liabilities and legalproceedings, as well as Upbancorp’s 2002 Annual Report on Form 10-K, some ofthe factors that could affect the ultimate disposition of those contingenciesare changes in applicable laws, the development of facts in individual cases,settlement opportunities and the actions of plaintiffs, judges and juries.

 

The followinginformation should be read in conjunction with the consolidated financialstatements of Upbancorp and notes thereto, appearing elsewhere in this report.

 

##### **Critical Accounting Policies**

 

Upbancorp’sconsolidated financial statements are prepared in accordance with accountingprinciples generally accepted in the United States and are consistent withpredominant practices in the financial services industry.  Application of critical accounting policies,those policies Management believes are the most important to Upbancorp’sfinancial position and results, requires Management to make estimates,assumptions, and judgments that affect the amounts reported in the financialstatements and accompanying notes and are based on information available as ofthe date of the financial statements. Future changes in information may affectthese estimates, assumptions, and judgments, which in turn may affect amountsreported in the financial statements.

 

Mostaccounting policies are not considered by management to be critical accountingpolicies. The most significant of these policies are presented in Note 1 to theconsolidated financial statements. These policies, along with the disclosurespresented in the other financial statement notes and in this discussion,provide information on how significant assets and liabilities are valued in thefinancial statements and how those values are determined.  Based on the valuation techniques used and thesensitivity of financial statement amounts to the methods, assumptions, andestimates underlying those amounts, Management has determined that itsaccounting policies with respect to the allowance for loan losses and definedbenefit plan and supplemental executive retirement plan are the accountingareas requiring subjective or complex judgments that are most important toUpbancorp’s financial position and results of operations. Those policies areconsidered to be critical accounting policies and are discussed below.

 

25

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#####  

##### **Allowance for Loan Losses**

 

Arriving at anappropriate level of reserve for loan losses involves a high degree ofjudgment. Upbancorp’s reserve for loan losses provides for probable lossesbased upon evaluations of known, and inherent risks in the loan portfolio.  Management uses historical information toassess the adequacy of the reserve for loan losses as well as the prevailingbusiness environment; as it is affected by changing economic conditions andvarious external factors, which may impact the portfolio in ways currentlyunforeseen. The reserve is increased by provisions for loan losses and byrecoveries of loans previously charged-off and reduced by loanscharged-off.  For a full discussion ofUpbancorp’s methodology of assessing the adequacy of the reserve for loanlosses, see Note 1 to “Notes to Consolidated Financial Statements” of this Form10-K.

 

**Defined Benefit Plan and SupplementalExecutive Retirement Plan**

 

The Plans’assets and liabilities are determined on an actuarial basis and are affected bythe estimated market-related value of plan assets, estimates of the expectedreturn on plan assets, discount rates and other assumptions inherent in thesevaluations. The Company reviews annually the assumptions underlying theactuarial calculations and makes changes to these assumptions, based on currentmarket conditions, as necessary. Actual changes in the fair market value ofplan assets and differences between the actual return on plan assets and theexpected return on plan assets will affect the amount of pension expense(income) ultimately recognized.

 

26

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**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 formanagement to assess the general positioning of the Company’s balance sheet,management uses an additional measurement tool to evaluate its asset/liabilitysensitivity which determines exposure to changes in interest rates by measuringthe change in net interest income as a percentage of capital, due to changes inrates over a one-year time horizon.

 

Management measures such change assuming an immediate and sustainedparallel shift in rates of 50, 100 and 200 basis points, both upward anddownward.  The model uses scheduledamortization, call date or final maturity as appropriate on all non-ratesensitive assets.  The model usesrepricing frequency on all variable rate assets and liabilities, it also uses a5-year decay analysis on all non-rate sensitive deposits. Prepayment rates onfixed rate loans have been adjusted up or down by 10% per year to incorporatehistorical experience in both an up-rate and down-rate environment. Utilizingthis measurement concept, the interest rate risk of the Company, expressed aschange in net interest income as a percentage of capital over a 1-year timehorizon due to changes in interest rates, at December 31, 2002 and 2001, was asfollows:

 
|                 |   | **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 uponthese analyses, management has determined there has been no material change atDecember 31, 2002, in interest rate risk for the Company, from December31, 2001, calculated results.

 

27

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**ITEM8:  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

**Upbancorp,Inc.**

**ConsolidatedStatements of Condition**
| **(Dollars  in thousands, except share data)******December 31,**                  |   | **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 consolidatedfinancial statements are an integral part of these statements.*

 

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**UPBANCORP, INC.**

**CONSOLIDATED STATEMENTS OF INCOME**

 
| **(Dollars  in thousands, except share data)  Years Ended December 31,** |   | **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 consolidatedfinancial statements are an integral part of these statements.*

 

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**UPBANCORP, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOW**

 
| **(Dollars  in thousands, except share data)  Years Ended December 31,**                            |   | **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 consolidatedfinancial statements are an integral part of these statements.*

 

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**UPBANCORP, INC.**

**CONSOLIDATED STATEMENTS OF CHANGES INSHAREHOLDERS’ EQUITY**

***(Dollarsin thousands, except share data)***

 
|                                                                              |   | **Common  Stock** |   | **Additional  Paid In  Capital** |   | **Retained  Earnings** |   | **Treasury  Stock** |   | **Other****Comprehensive  Income  (Loss)** |   | **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 consolidatedfinancial statements are an integral part of these statements.*

 

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**UPBANCORP, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2002, 2001and 2000**

***(Dollarsin thousands, except share data)***

 

**Note 1: Summary of Significant AccountingPolicies**

 

Nature ofbusiness:

 

Upbancorp,Inc. (“Upbancorp” or the “Company”), is a bank holding company, organized in 1983under the laws of the State of Delaware. The Company owns all of theoutstanding common stock of Uptown National Bank of Chicago (“Uptown”),organized in 1929 and located in Chicago, Illinois. Heritage Bank, a divisionof Uptown National Bank of Chicago (“Heritage”), was organized in 1977 and islocated in the Phoenix metropolitan area. Upbancorp does not engage in anyactivities other than providing administrative services and acting as a holdingcompany for Uptown.

 

Uptown is afull-service community bank which operates seven banking offices and one loanproduction office in the Chicagoland area and metropolitan Phoenix area. Uptownis engaged in the general commercial banking business in addition to offering acomplete range of retail banking services. Uptown conducts general bankingbusiness, both commercial and consumer including: the acceptance and servicingof demand, savings, and time deposit accounts; commercial, industrial, consumerand real estate lending; collections; safe deposit box operations; and otherbanking services tailored for both commercial and retail clients.

 

Uptown has awholly-owned subsidiary, Broadway Clark Building Corporation (“BCBC”), whichowns all of the real estate that is used in connection with the operation ofUptown’s Chicagoland area business with the exception of four facilities, whichare leased.

 

Principles ofconsolidation:

 

Theconsolidated financial statements include the accounts of Upbancorp and itswholly-owned subsidiary Uptown (including its wholly-owned subsidiary BCBC)after elimination of all intercompany balances and transactions.

 

Basis offinancial statement presentation:

 

The accountingand reporting policies of the Company conform to generally accepted accountingprinciples. In preparing the accompanying consolidated financial statements,management is required to make estimates and assumptions that affect thereported amounts in the consolidated financial statements and the accompanyingnotes. Significant estimates which are particularly susceptible to change in ashort period of time include the determination of the fair value of securitiesand the allowance for loan losses. Actual results could differ from thoseestimates.

 

Based on theCompany’s approach to decision making, it has concluded that its business iscomprised of a single segment.

 

Securities:

 

Securitiesclassified as available-for-sale are those debt securities the Subsidiary Bankintends to hold for an indefinite period of time, but not necessarily tomaturity and equity securities. Any decision to sell a security classified asavailable-for-sale would be based on various factors, including significantmovements in interest rates, changes in the maturity mix of the SubsidiaryBank’s assets and liabilities, liquidity needs, regulatory capitalconsiderations, and other similar factors.

 

Securitiesavailable-for-sale are reported at fair value with unrealized gains or lossesreported as a separate component of other comprehensive income net of therelated deferred tax effect. The amortization of premiums and accretion ofdiscounts, computed by the interest method over their contractual lives, arerecognized in interest income.

 

Realized gainsor losses, determined on the basis of the cost of specific securities sold, areincluded in earnings.

 

Declines inthe fair value of individual securities classified as either held-to-maturityor available-for-sale below their amortized cost that are determined to beother than temporary result in write-downs of the individual securities totheir fair value with the resulting write-downs included in current earnings asrealized losses.

 

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Nonmarketableequity securities:

 

The Bank ownsan investment in capital stock in the Federal Reserve Bank.  Also, as a member of the Federal Home LoanBank System, the Bank is required to maintain an investment in capital stock ofthe Federal Home Loan Bank in an amount equal to 1 percent of its outstandingmortgage loans.  No ready market existsfor these securities and they have no quoted market value.  These securities are redeemable at par;therefore, market value equals cost.

 

Mortgagesheld-for-sale:

 

Mortgagesheld-for-sale are those loans the Bank has the intent to sell in theforeseeable future.  They are carried atthe lower of aggregate cost or market value. Gains or losses on sales of loans are recognized at settlement dates andare determined by the difference between the sales proceeds and the carryingvalue of the loans.  All sales are madewithout recourse.

 

Loans andAllowance for loan losses:

 

Loans thatmanagement has the intent and ability to hold for the foreseeable future oruntil maturity or pay-off are reported at their outstanding unpaid principalbalances reduced by any charge-offs, the allowance for loan losses, anddeferred loan fees.

 

Loanorigination and commitment fees are deferred and the net amount is accreted asan 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 creditand fees related to standby letters of credit are recognized over thecommitment period.

 

Interest isaccrued daily on the outstanding balances. The accrual of interest on any loan is discontinued when, in the opinionof management, there is reasonable doubt as to the collectibility of interestor principal. It is management’s policy to place loans on nonaccrual whenprincipal and interest is 90 days or more past due.  Such loans may continue on accrual only when they are both wellsecured and in the process of collection.

 

A loan isimpaired when it is probable the Subsidiary Bank will be unable to collect allcontractual principal and interest payments due in accordance with the terms ofthe loan agreement. Impaired loans are measured based on the present value ofexpected future cash flows discounted at the loan’s effective interest rate orat the fair value of the collateral if the loan is collateral dependent. Whenthe measure of the impaired loan is less than the recorded investment in theloan, the impairment, as well as any subsequent changes, is recorded through avaluation allowance included in the allowance for loan losses. All loan typesare accounted for as impaired loans when they meet the above criteria.

 

The allowancefor loan losses is established through a provision for loan losses charged toexpense. We maintain our allowance for loan losses at a level that managementbelieves will be adequate to absorb probable losses on existing loans based onan evaluation of the collectibility of loans and prior loss experience. We usea 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 theoriginating loan officer or loan committee, with one being the best case andeight being a loss or the worst case. Loan loss reserve factors are multipliedagainst the balances in each risk-rating category to determine an appropriatelevel for the allowance for loan losses. Loans with risk ratings between fiveand eight are monitored much closer by the officers. Control of our loanquality is continually monitored by our management and our loan committee on amonthly basis.  This is also reviewedand monitored by our board of directors on a quarterly basis and is continuallysubjected to oversight by our board of directors through its members who serveon the loan committee. We consistently apply our methodology for determiningthe adequacy of the allowance for loan losses, but may make adjustments to ourmethodologies and assumptions based on historical information related tocharge-offs and management’s evaluation of the current loan portfolio.  Additionally, regulatory agencies, as anintegral part of their examination process, periodically review the Company’sallowance for loan losses, and may require the Company to make additions to theallowance based on their judgement about information available to them at thetime of their examinations.

 

Premises andequipment:

 

Premises andequipment are stated at cost less accumulated depreciation. Depreciation iscomputed principally by the straight-line method over their estimated usefullives.  Management periodically reviewsthe carrying value of its long-lived assets to determine if an impairment has occurredor whether changes in circumstances have occurred that would require a revisionto the remaining useful life. In making such determination, managementevaluates the performance, on an undiscounted basis, of the underlyingoperations or assets which give rise to such amount.

 

33

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Transfers offinancial assets:

 

Transfers offinancial assets are accounted for as sales, when control over the assets hasbeen surrendered.  Control overtransferred assets is deemed to be surrendered when (1) the assets have beenisolated from the Company, (2) the transferee obtains the right (free ofconditions that constrain it from taking advantage of that right) to pledge orexchange the transferred assets, and (3) the Company does not maintaineffective control over the transferred assets through an agreement torepurchase them before their maturity.

 

Income taxes:

 

As part of theprocess of preparing the consolidated financial statements the Company isrequired to estimate income taxes for federal and state purposes. This processinvolves estimating the Company’s actual current tax exposure together withassessing temporary differences resulting from differing treatment of items,such as deferred revenue, for tax and accounting purposes. These differencesresult in deferred tax assets and liabilities, which are included within theCompany’s consolidated statements of financial condition. Management must thenassess the likelihood that the deferred tax assets will be recovered fromfuture taxable income and to the extent management believes that recovery isnot likely, a valuation allowance must be established. To the extent theCompany establishes a valuation allowance or increases this allowance in aperiod, the Company would include an expense within the tax provision in thestatements of income. Significant management judgment is required indetermining the provision for income taxes, deferred tax assets and liabilitiesand any valuation allowance recorded against net deferred tax assets. Avaluation allowance is based on management’s estimates of taxable income in thejurisdictions in which the Company operates and the period over which deferredtax assets will be recoverable. In the event actual results differ from theseestimates, or if management adjusts these estimates in future periods theCompany may need to establish an additional valuation allowance which couldmaterially impact the financial position and results of operations.

 

Comprehensiveincome:

 

Accounting principlesrequire that recognized revenue, expenses, gains and losses be included in netincome.  Although certain changes inassets and liabilities, such as unrealized gains and losses on available forsale securities are reported as a separate component of the equity sections ofthe balance sheet, such items, along with net income, are components ofcomprehensive income.

 

Earnings percommon share:

 

Basic earningsper share are calculated using the weighted average number of sharesoutstanding during the year. Diluted earnings do not differ from basic earningsper share.

 

Reclassifications:

 

Certainamounts in the 2001 and 2000 consolidated financial statements have beenreclassified to conform with the 2002 presentation. Such reclassifications haveno effect on previously reported net income.

 

Guarantees:

 

The FinancialAccounting Standards Board has issued Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others” - an interpretation of FASB StatementNos. 5, 57, and 107 and rescission of FASB Interpretation No. 34.  This interpretation elaborates on thedisclosures to be made by a guarantor in its interim and annual financial statementsabout its obligations under certain guarantees that it has issued.  It also clarifies that a guarantor isrequired to recognize, at the inception of a guarantee, a liability for thefair value of the obligation undertaken in issuing the guarantee.  The initial recognition and measurementprovisions of the Interpretation are applicable on a prospective basis toguarantees issued or modified after December 15, 2002.  Implementation of these provisions of theInterpretation is not expected to have a material impact on the Company’sconsolidated financial statements.  Thedisclosure requirements of the Interpretation are effective for financialstatements of interim or annual periods ending after December 15, 2002, andhave been adopted in the consolidated financial statements for December 31,2002.

 

**Note 2. Restrictions on Cash and Due FromBanks**

 

The SubsidiaryBank is required to maintain reserve balances in cash or on deposit with theFederal Reserve Bank, based on a percentage of deposits. The total of thesereserve balances was approximately $549 and $439 at December 31, 2002 and 2001.

 

34

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**Note 3. Securities**

 

The amortizedcost and fair value of securities available-for-sale are as follows at December31:

 
|                                 |   | **2002**            |   |
|--------------------------------------|--------|---------------------|--------|
|                                 |   | **Amortized  Cost** |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair  Value** |   |
| 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  Cost** |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair  Value** |   |
| 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 amortizedcost and fair value of debt securities available-for-sale at December 31, 2002,by contractual maturity, are shown below.

 
|                                    |   | **Amortized  Cost** |   | **Fair  Value** |   |
|-----------------------------------------|--------|---------------------|--------|-----------------|--------|
| 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 gainsrealized were $0 in 2002, $595 in 2001 and $7 in 2000. Gross losses realizedwere $0 in 2002, $81 in 2001 and $52 in 2000.

 

Investmentsecurities carried at approximately $33,001 and $34,722 at December 31, 2002and 2001, respectively, were pledged to secure public and trust deposits,borrowed funds and for other purposes as required or permitted by law.

 

35

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**Note4. Loans**

 

Majorclassifications 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 theallowance 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 December31, 2002 and 2001, the Company’s recorded investment in impaired loans and therelated valuation allowance are as follows:

 
|                            |   | **2002**            |   | **2001**                 |   |
|---------------------------------|--------|---------------------|--------|--------------------------|--------|
|                            |   | **Carrying  Value** |   | **Valuation  Allowance** |   | **Carrying  Value** |   | **Valuation  Allowance** |   |
| 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 valuationallowance is included in the allowance for loan losses on the statements ofcondition. The average recorded investment in impaired loans for years endedDecember 31, 2002 and 2001, was $5,898 and $3,040, respectively. No interestincome was recognized in 2002, 2001 and 2000, on impaired loans.

 

36

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The followingtable summarizes the amounts of nonperforming loans and nonperforming assets atDecember 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 followingis 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 |   |

 

 

Depreciationexpense on premises and equipment totaled $1,343, $1,307 and $1,192 for 2002,2001 and 2000, respectively.

 

The buildingowned by BCBC, in which the main facility of the Bank is located, has storesand offices which are rented. Total rent received was $1,129, $1,146 and $1,127in 2002, 2001 and 2000, respectively and is recorded as a reduction of netoccupancy expense.

 

**Note 6. Deposits**

 

The aggregateamount of certificates of deposits of $100 or more totaled $62,965 and $48,075at December 31, 2002 and 2001.

 

Maturities oftime 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 withone customer in the amount of $32,415 which are included in demand deposits.

 

37

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**Note 7. Borrowed Funds and Note Payable**

 

At December 31, 2002 and 2001, borrowed funds and note payableconsisted 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 anarrangement with the Federal Home Loan Bank of Chicago whereby the FHLB willmake advances to the Bank with repayment terms from overnight to ten years. TheBank is eligible to obtain credit up to 20 times the member Bank’s holding ofFederal Home Loan Capital Stock; these eligible borrowings amount to $29,000.

 

As requiredunder the agreement, the advances can be collateralized by the following:qualifying 1-4 family first mortgages, private mortgage-backed securities orU.S. Treasury and Agency obligations. Uptown has pledged a combination of U.S.Treasury and Agency mortgage-backed securities.

 

The Companyhas a $10 million line of credit, a secured revolving note payable, with acorrespondent 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. Theexpiration date of the line is March 1, 2003. The note also contains certaincovenants which limit changes in capital structure, the purchase of or mergerwith other banks and/or businesses, and the guarantees of other liabilities andobligations. In addition, the Company must meet certain financial ratios.  Subsequent to December 31, 2002, the notepayable was renewed under the same terms and conditions with an expiration dateof March 1, 2004.

 

**Note 8. Pension Plans**

 

Uptown has adefined benefit plan covering substantially all employees in the Company. Theplan is based on years of service and the employee’s average compensationduring all years of employment. The Company’s funding policy is to meet theminimum funding requirements set forth in the Employee Retirement IncomeSecurity Act of 1974 (“ERISA”), plus additional amounts as appropriate. Inaddition, the Company also has a Supplemental Executive Retirement Plan (the“SERP”) for certain executive officers.

 

38

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The followingtable provides a reconciliation of the changes in the Plans’ benefitobligations and fair value of assets over the two-year period ended December31, 2002, and a statement of the Plans’ funded status as of December 31 of bothyears:

 
|                                          |   | **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 amountrecognized is recorded in the financial statements with $1,310 in other assetsand $557 in other liabilities

 

As of December31, 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 thedefined benefit plan and the SERP were $7,359 and $0, respectively.

 

The followingtable provides the components of net periodic benefit cost for the plans fiscalyears 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

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Theassumptions used in the measurement of the Company’s benefit obligation as ofDecember 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 provisionfor income taxes for the years ended December 31, 2002, 2001 and 2000, iscomprised 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 componentsof the net deferred tax assets which are included in other assets, are asfollows:

 
|                                                   |   | **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 hasdetermined that a valuation allowance is not required at December 31, 2002 and2001.

 

The followingtable reconciles the statutory Federal income tax rate with the effectiveincome 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

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**Note 10. Related Parties**

 

The SubsidiaryBank has entered into transactions with its directors and their affiliates(related parties). The aggregate amount of loans to such related parties atDecember 31, 2002 and 2001, was $3,340 and $3,276, respectively. These loanswere made using the same criteria and at interest rates and terms that would becomparable to loans granted to a borrower who is not an executive officer ordirector. During 2002, new loans and advances to such related parties amountedto $524 and repayments amounted to $460.

 

**Note 11. Commitments, Contingencies andCredit Risk**

 

Financial instruments with off-balance-sheet risk:  The Subsidiary Bank is party to financialinstruments with off-balance sheet risk in the normal course of business tomeet the financing needs of their customers. These financial instrumentsinclude commitments to extend credit and standby letters of credit. Theseinstruments involve, to varying degrees, elements of credit risk in excess ofthe amount recognized in the balance sheet. The contract amounts of theseinstruments reflect the extent of involvement a bank has in particular classesof financial instruments.

 

The SubsidiaryBank’s exposure to credit loss in the event of nonperformance by the otherparty for commitments to extend credit and standby and commercial letters ofcredit is represented by the contractual amount of those instruments. TheSubsidiary Bank uses the same credit policies in making commitments andconditional obligations as they do for on-balance sheet instruments.

 

Commitments toextend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract. Commitments generallyhave fixed expiration dates or other termination clauses and may requirepayment of a fee. Since many of the commitments are expected to expire withoutbeing drawn upon, the total commitment amounts do not necessarily representfuture cash requirements. The Subsidiary Bank evaluates each customer’screditworthiness on a case-by-case basis. The amount of collateral obtained ifdeemed necessary by the Bank upon an extension of credit is based onmanagement’s credit evaluation of the customer. Collateral held varies but mayinclude accounts receivable, marketable securities, inventory, property, plant,and equipment, and income-producing commercial properties and residentialproperties.

 

Standbyletters of credit are conditional commitments issued by the Bank to guaranteethe performance of a customer to a third party.  Those guarantees are primarily issued to support public andprivate borrowings arrangements and, generally, have terms of one year or less.  The credit risk involved in issuing lettersof credit is essentially the same as involved in extending loan facilities tocustomers.  The Bank holds collateral,which may include accounts receivables, inventory, property and equipment,income producing properties, supporting those commitments if deemednecessary.  In the event, the customerdoes not perform in accordance with the terms of the agreement with the thirdparty, the Bank would be required to fund the commitment. The maximum potentialamount of future payments the Bank could be required to make is represented bythe contractual amount shown in the summary below. If the commitment is fundedthe Bank would be entitled to seek recovery from the customer.  At December 31, 2002 and 2001 no amountshave been recorded as liabilities for the Bank’s potential obligations underthese 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

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The Companyleases certain office facilities with non-related parties under variousoperating lease agreements that provide for payment of taxes, insurance andmaintenance costs. These leases generally include renewal options. The futureminimum 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 rentexpense 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 legalactions arising in the ordinary course of business. In the opinion ofmanagement, after consultation with legal counsel, the ultimate disposition ofthese matters is not expected to have a material adverse effect on theconsolidated financial condition of the Company.

 

Concentrations of credit risk:  In addition to financial instruments withoff-balance-sheet risk, the Company, to a certain extent, is exposed to varyingrisks associated with concentrations of credit. Concentrations of credit riskgenerally exist if a number of counterparties are engaged in similar economiccharacteristics that would cause their ability to meet contractual obligationsto be similarly affected by economic or other conditions.

 

The Companyconducts substantially all of its lending activities throughout northeasternIllinois and the greater Phoenix metropolitan area. As of December 31, 2002,loans to customers in Arizona were approximately $104 million. Loans granted tobusinesses are primarily secured by business assets, owner-occupied real estateor personal assets of commercial borrowers. Loans to individuals are primarilysecured by automobiles, residential real estate or other personal assets. Sincethe Company’s borrowers and its loan collateral have geographic concentrationin the greater Chicago and greater Phoenix metropolitan areas, the Companycould have exposure to a decline in those local economies and real estatemarkets. However, management believes that the diversity of its customer baseand local economies, its knowledge of the local markets, and its proximity tocustomers limits the risk of exposure to adverse economic conditions.

 

As of December31, 2002, the Company’s loan portfolio included $32,683 of loans secured byaircraft. The Bank’s lending policies for aircraft loans require loans to bewell collateralized and supported by cash flows.  Collateral for aircraft loans includes all makes and models ofgeneral aviation manufactured piston driven aircraft.  Credit losses arising from aircraft loans compare favorably withthe Company’s credit loss experience on its loan portfolio as a whole.

 

The nature ofthe Bank’s business requires that it maintain amounts due from banks andfederal funds sold which, at times, may exceed federally insured limits.  Management monitors these correspondentrelationships and the Bank has not experienced any losses in such accounts.

 

**Note 12. Dividend Restrictions and Regulatory Capital Requirements**

 

Bankregulations place restrictions upon the amount of dividends that can be paid tothe Company by its Subsidiary Bank.  Theavailability of dividends may be further limited because of the need to maintaincapital ratios satisfactory to applicable regulatory agencies.

 

The Companyand the Subsidiary Bank are subject to various regulatory capital requirementsadministered by the Federal banking agencies. Failure to meet minimum capitalrequirements can cause regulators to initiate certain mandatory - and possiblyadditional discretionary - action that, if undertaken could have a directmaterial effect on the Company’s financial statements. Under capital adequacyguidelines and the regulatory framework for prompt corrective action, theCompany and the Bank must meet specific capital guidelines that involvequantitative measures of the Company’s and the Bank’s assets, liabilities, andcertain off-balance sheet items as calculated under regulatory accounting practices.The Company’s and the Bank’s capital amounts and classification are alsosubject to qualitative judgments by the regulators about components, riskweightings, and other factors. Prompt corrective action provisions do not applyto bank holding companies.

 

42

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Quantitativemeasures established by regulation to ensure capital adequacy require the Bankto maintain minimum amounts and ratios (set forth in the table below) of totaland Tier 1 capital (as defined in the regulations) to risk-weighted assets (asdefined), and of Tier 1 capital (as defined) to average assets (as defined).Management believes the Company and the Bank meet all capital adequacyrequirements to which they are subject to at December 31, 2002.

 

At December31, 2002, both entities exceeded regulatory established minimums as defined forfinancial institutions. To be well capitalized, the Bank must maintain minimumtotal risk-based, Tier 1 risk based, and Tier 1 leverage ratios as set forth inthe table below. There are no conditions or events since December 31, 2002,that management believes have changed the Bank’s capital position.

 

The Company’sratios are presented in the following table:

 
|                                      |   | **Actual** |   | **For  capital  adequacy  purposes** |   | **To  be well  capitalized under  prompt corrective  action provisions** |   |
|-------------------------------------------|--------|------------|--------|--------------------------------------|--------|--------------------------------------------------------------------------|--------|
|                                      |   | **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 followingmethods and assumptions were used by the Company in estimating its fair valueof its financial instruments:

 

*Cash and due from banks and federal fundssold: *Thecarrying amounts reported in the balance sheet for cash and due from banks andfederal funds sold approximate their fair values.

 

*Securities available-for-sale: *Fair values ofsecurities 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 securitiesand they have no quoted market value. These securities are redeemable at par; therefore, market value equalscost.

 

*Mortgages held-for-sale*:  Fair values of mortgages held-for-sale arebased on quoted market prices of similar loans sold on the secondary market.

 

*Loans:*  The fair values of the loan portfolio areestimated based upon discounted cash flow analyses using interest ratescurrently being offered for loans with similar terms to borrowers with similarcredit quality.

 

43

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*Deposit liabilities*:  The fair values disclosed for deposits withno defined maturities is equal to their carrying amounts which represent theamount payable on demand.  The carryingamounts for variable-rate, fixed-term money market accounts and certificates ofdeposit approximate their fair value at the reporting date.  Fair values for fixed rate certificates ofdeposit are estimated using a discounted cash flow calculation that appliesinterest rates currently being offered on certificates to a schedule ofaggregated expected monthly maturities on time deposits.

 

*Borrowed funds and note payable:*  The carrying amounts of borrowings undernote payable, repurchase agreements and other short-term borrowings approximatetheir fair values.  The carrying amountsof FHLB borrowings are based on the convertible advances rate at December 31,2002.

 

*Accrued interest:*  The carrying amounts of accrued interestapproximate their fair values.

 

*Off-balance sheet instruments:*Fair values for the Company’s off-balance sheet lending commitments (letters ofcredit and commitments to extend credit) are based on fees currently charged toenter into similar agreements, taking into account the remaining terms of theagreements and the counterparties’ credit standing. The fair value for suchcommitments is nominal.

 

The estimatedfair values of the Company’s financial instruments were as follows at December31,

 
|                                    |   | **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

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**Note 14. Upbancorp, Inc. - Parent Only**

**Financial Statements**

 

The Parent Company’s condensedfinancial information, which follows, conforms with the accounting policiesdescribed in the preceding notes:

 

**Statements of Condition**

 
| **(Dollars in thousands, except share data)  December 31,** |   | **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)Years ended December 31,** |   | **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

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##### **Note14. Upbancorp, Inc. – Parent Only**

 

**Statements of CashFlows**

 
| **(Dollars  in thousands, except share data)  Years ended December 31,**                     |   | **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

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***Note15. Unaudited Interim Financial Data***

*** ***

The followingtable reflects summarized quarterly data for the periods described, inthousands, 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 |   |

 

##### **Note 16.  Definitive Agreement**

 

On February14, 2003, Upbancorp, Inc., and Bridgeview Bancorp, Inc. (“Bridgeview”), andBridgeview Acquisition Corp., a wholly owned subsidiary of Bridgeview(“MergerSub”), entered into an Agreement and Plan of Merger, pursuant to whichMergerSub will be merged with and into Upbancorp.  As a result of the merger, shareholders will receiveapproximately $67.90 in exchange for each share of common stock.

 

The merger issubject to approval by the shareholders of Upbancorp who own at least a majorityof the issued and outstanding common stock of Upbancorp, receipt of certainregulatory approvals and other customary conditions set forth in the Agreementand Plan of Merger.

 

Pursuant tothe Agreement and Plan of Merger, upon consummation of the merger, thecertificate of incorporation of MergerSub shall be the certificate ofincorporation of the surviving corporation, and the bylaws of MergerSub shallbe the bylaws of the surviving corporation, until each is amended in accordancewith law.  The directors and officers ofMergerSub will be the directors and officers of the surviving corporation.

 

The Agreementand Plan of Merger may be terminated by either Bridgeview or Upbancorp if themerger has not been consummated by August 1, 2003, provided the party seekingto terminate the Agreement and Plan of Merger is not then in material breach ofthe Agreement and Plan of Merger.

 

47

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**Reportof Management on Responsibility for Financial Reporting**

**Upbancorp, Inc. and Subsidiaries**

 

To the Shareholders ofUpbancorp, Inc.:

 

Theaccompanying consolidated financial statements were prepared by Management, whois responsible for the integrity and objectivity of the data presented. In theopinion of Management, the financial statements, which necessarily includeamounts based on Management’s best estimates and judgments, have been preparedin conformity with accounting principles generally accepted in the UnitedStates of America appropriate to the circumstances.

 

Managementdepends upon the Company’s system of internal controls in meeting itsresponsibilities for reliable financial statements. This system is designed toprovide reasonable assurance that assets are safeguarded and that transactionsare properly recorded and executed in accordance with Management’sauthorization. Judgments are required to assess and balance the relative costand the expected benefits of these controls. As an integral part of the systemof internal controls, the Bank Subsidiary contracts with a professional staffof Independent Internal Auditors who conduct operational, financial, andspecial audits, and coordinate audit coverage with the Independent Auditors.

 

Theconsolidated financial statements have been audited by our IndependentAuditors, McGladrey & Pullen LLP, who render an independent professionalopinion on Management’s financial statements.

 

The AuditCommittee of Upbancorp, Inc.’s Board of Directors, composed solely of outsidedirectors, meets regularly with the Independent Internal Auditors, theIndependent Auditors and Management to assess the scope of the annualexamination plan and to discuss audit, internal control and financial reportingissues, including major changes in accounting policies and reporting practices.The Independent Internal Auditors and the Independent Auditors have free accessto the Audit Committee, without Management present, to discuss the results oftheir audit work and their evaluations of the adequacy of internal controls andthe 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

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#### **Report of Independent Public Accountants**

 

To the Shareholders and Boardof Directors of Upbancorp, Inc.:

 

We haveaudited the accompanying consolidated statements of condition of Upbancorp,Inc. and subsidiaries as of December 31, 2002 and 2001, and the relatedconsolidated statements of income, cash flows and changes in shareholders’equity for each of the three years in the period ended December 31, 2002. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conductedour audits in accordance with auditing standards generally accepted in theUnited States of America. Those standards require that we plan and perform theaudits to obtain reasonable assurance about whether the financial statementsare free of material misstatement. The audits include examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements. The audits also include assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Upbancorp, Inc. and subsidiariesas of December 31, 2002 and 2001, and the results of their operations and theircash flows for each of the three years in the period ended December 31, 2002,in conformity with accounting principles generally accepted in the UnitedStates of America.

 
|               | /s/  McGladrey & Pullen, LLP |
|--------------------|----------------------------------|
|               |
| Chicago,  Illinois |
| March 7,  2003     |

# ** **

49

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# **ITEM 9:  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES**

 

None.

 

**PART III**

 

# **ITEM 10:  DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT**

 

Informationregarding the Directors and Executive Officers of the Company, their familyrelationships and their business experience is contained in the “Informationabout Directors and Nominees” and “Executive Officers” sections of the ProxyStatement for the 2003 Annual Meeting of Shareholders of the Company, which isincorporated herein by reference.

 

# **ITEM 11:  EXECUTIVE COMPENSATION**

 

Informationregarding compensation of the Executive Officers of the Company is contained inthe “Executive Compensation” section of the Proxy Statement for the 2003 AnnualMeeting of Shareholders of the Company, which is incorporated herein byreference.

 

# **ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDERS MATTERS**

 

Informationregarding security ownership of certain beneficial owners and management iscontained in the “Security Ownership of Certain Beneficial Owners andManagement” section of the Proxy Statement for the 2003 Annual Meeting ofShareholders of the Company, which is incorporated herein by reference.

 

# **ITEM 13:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

Informationregarding certain relationships and related transactions of the Company iscontained in the “Certain Relationships and Related Transactions” section ofthe Proxy Statement for the 2003 Annual Meeting of Shareholders of the Company,which is incorporated herein by reference. Further information with respect toloans to the Directors and Executive Officers of the Company is provided inNote 10 in the Notes to Consolidated Financial Statements found in Item 8 ofthis Form 10-K.

 

# **ITEM 14: CONTROLS AND PROCEDURES**

 

(a)  Evaluation of disclosure controls andprocedures

 

Within 90 days prior to thefiling day of this report (the “Evaluation Date”, Upbancorp carried out anevaluation under the supervision and with the participation of Upbancorp’smanagement including Upbancorp’s President and Chief Executive Officer and itsExecutive Vice President, Chief Financial Officer, and Principal AccountingOfficer of the effectiveness of the design and operation of Upbancorp’sdisclosure controls and procedures pursuant to Rule 13a-14 and 15d-14 of theSecurities and Exchange Act of 1934 (the ‘Exchange Act”). Based upon thatevaluation, the President and Chief Executive Officer and Executive VicePresident, Chief Financial Officer, and Financial Accounting Officer concludedthat as of the Evaluation Date, Upbancorp’s disclosure controls and proceduresare effective to ensure that the information required to be disclosed byUpbancorp in reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported within the time period specified inSecurities and Exchange Commission rules and forms.

 

(b) Changes ininternal controls,

 

There were nosignificant changes in Upbancorp’s internal controls or in other factors thatcould significantly affect these controls subsequent to the Evaluation Date norwere there any significant deficiencies or material weaknesses in Upbancorp’sinternal controls.

 

50

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**PART IV**

 

# **ITEM 15. **EXHIBITS,FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

 

(a)                                  Thefollowing exhibits, financial statements and financial statement schedules arefiled as part of this report:

 

##### **FINANCIAL STATEMENTS**

 

ConsolidatedStatements of Condition - December 31, 2002 and 2001

 

ConsolidatedStatements of Income - Years ended December 31, 2002, 2001 and 2000

 

ConsolidatedStatements of Cash Flows - Years ended December 31, 2002, 2001 and 2000

 

ConsolidatedStatements of Changes in Shareholders’ Equity - Years endedDecember 31, 2002, 2001 and 2000

 

Notes toConsolidated Financial Statements

 

Report ofIndependent Public Accountants

 

###### **FINANCIAL STATEMENT SCHEDULES**

 

All schedules normally required by Form 10-K are omitted since they areeither not applicable or the required information is shown in the financialstatements 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

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**SIGNATURES**

 

**Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.**

 
| Date: March  7, 2003 |   | UPBANCORP,  INC.                                                |   |
|----------------------|--------|-----------------------------------------------------------------|--------|
|                 |   | (The  Registrant)                                               |
|                 |   |                                                            |
|                 |   | /s/ Richard  K. Ostrom                                          |   |
|                 |   | Richard K.  Ostrom                                              |
|                 |   | Chairman of  the Board,  President and Chief  Executive Officer |

 

**Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in theircapacities 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

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**CERTIFICATION PURSUANT TO 18 U.S.C. SECTION1350,AS ADOPTED PURSUANT TO SECTION 302 OF THESARBANES-OXLEY ACT OF 2002**

 

I, Richard K. Ostrom, Chairmanof the Board, President and Chief Executive Officer, certify that:

1.)                                   Ihave reviewed this annual report on Form 10-K of Upbancorp, Inc.;

2.)                                   Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary in order to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this annual report;

3.)                                   Basedon my knowledge, the financial statements and other financial informationincluded in this annual report fairly present in all material respects thefinancial condition, results of operations and cash flow of the registrant asof and for the periods presented in this annual report;

4.)                                   Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActsRules 13a-14 and 15d-14) for the registrant and have:

a.)                       Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

b.)                      Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

c.)                       Presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

5.)                                   Theregistrant’s other certifying officers and I have disclosed, based upon ourmost recent evaluation, to the registrant’s auditors and the audit committee ofthe registrant’s board of directors (or persons performing the equivalentfunctions):

a.)                       All significant deficiencies inthe design or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditor any material weaknesses ininternal controls; and

b.)                      Any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

6.)                                   Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| March 7,  2003 |                                                           |
|----------------|----------------------------------------------------------------|
|           |                                                           | /s/ Richard K. Ostrom |
|           | Richard K. Ostrom                                              |
|           | Chairman of the Board,  President and  Chief Executive Officer |

 

53

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**CERTIFICATION PURSUANT TO 18 U.S.C. SECTION1350,AS ADOPTED PURSUANT TO SECTION 302 OF THESARBANES-OXLEY ACT OF 2002**

 

I, Kathleen L. Harris, SeniorVice President and Chief Financial Officer, certify that:

1.)         I have reviewed this annual report on Form10-K of Upbancorp, Inc.;

2.)         Based on my knowledge, this annual report doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary in order to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

3.)         Based on my knowledge, the financialstatements and other financial information included in this annual reportfairly present in all material respects the financial condition, results ofoperations and cash flow of the registrant as of and for the periods presentedin this annual report;

4.)         The registrant’s other certifying officers andI are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Acts Rules 13a-14 and 15d-14) for theregistrant and have:

a.)           Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

b.)          Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

c.)           Presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

5.)         The registrant’s other certifying officers andI have disclosed, based upon our most recent evaluation, to the registrant’sauditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions):

a.)           Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditor anymaterial weaknesses in internal controls; and

b.)          Anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

6.)         The registrant’s other certifying officers andI have indicated in this annual report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

 
| March 7,  2003 |                                               |
|----------------|----------------------------------------------------|
|           |                                               | /s/ Kathleen L. Harris |
|           | Kathleen L. Harris                                 |
|           | Senior Vice President and  Chief Financial Officer |

 

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