** **

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

** **

**FORM 10-Q**

 
| **ý**                                            | **Quarterly Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|-------------------------------------------------------|----------------------------------------------------------------------------------------------|
|                                                  |
| **For the quarterly period ended September 30, 2002** | **Commission file number 01-12292**                                                          |
|                                                       |                                                                                              |  |

 

 

| **UPBANCORP, INC.**                                             |
|-----------------------------------------------------------------|
| (Exact name 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**             |   | **(773) 878-2000** |
| (Address of principal executive offices)(zip code)              |   | (Registrant’s telephone number  including area code) |

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing for the past 90 days.      Yes         ý            No           o

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock as of the latestpracticable date: Eight hundred thirty five thousand fifty five (835,055)common shares were outstanding as of November 8, 2002.

 

 

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**UPBANCORP,INC.**

**Form 10-Q9/30/02**

** **

**Index**

 
|                               | Cover Page                                                                                           |
|------------------------------------|------------------------------------------------------------------------------------------------------|
| **PART I - FINANCIAL INFORMATION** |
| **Item 1.**                        | Financial Statements                                                                                 |
|                               |                                                                                                 |
|                               | Consolidated Statements of Condition                                                                 |
|                               |                                                                                                 |
|                               | Consolidated Statements of Income and Comprehensive  Income                                          |
|                               |                                                                                                 |
|                               | Consolidated Statements of Cash flow                                                                 |
|                               |                                                                                                 |
|                               | Consolidated Statements of Changes in  Equity Capital and Notes to Consolidated Financial Statements |
|                               |                                                                                                 |
| **Item 2.**                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations          |
|                               |                                                                                                 |
| **Item 3.**                        | Quantitative and Qualitative Disclosures on  Market Risk                                             |
| **Item 4.**                        | Controls and Procedures                                                                              |
|                               |                                                                                                 |
| **PART II - OTHER INFORMATION**    |
|                               |                                                                                                 |
|                               | Signature Page                                                                                       |
|                               |                                                                                                 |
|                               | Section 302 Certifications                                                                           |
|                               |                                                                                                 |
| Exhibit 99.1                       | Section 906 Certifications                                                                           |

 

----

 

PART 1 - FinancialInformation

Item 1. Financial Statements

 

**UPBANCORP, INC.**

**CONSOLIDATEDSTATEMENTS OF CONDITION**

 
| ***(Dollars in thousands, except  share data) (Unaudited)***                                |   | **September  30, 2002** |    | **December  31, 2001** |   |
|---------------------------------------------------------------------------------------------|--------|-------------------------|---------|------------------------|--------|
| **Assets**                                                                                  |   |                    |    |                   |   |
| Cash and due from banks                                                                     |   | $                       | 20,301  |                   | $      | 14,736 |   |
| Federal funds sold                                                                          |   | 16,000                  |    | 0                      |   |
| Securities available-for-sale                                                               |   | 64,471                  |    | 60,614                 |   |
| Nonmarketable equity securities                                                             |   | 1,873                   |    | 1,818                  |   |
| Mortgages held-for-sale                                                                     |   | 301                     |    | 945                    |   |
| Loans (net of allowance for loan losses of $4,724  and $4,098 in 2002 and 2001)             |   | 298,279                 |    | 299,630                |   |
| Premises and equipment, net                                                                 |   | 5,223                   |    | 5,146                  |   |
| Accrued interest  and other assets                                                     |   | 6,895                   |    | 6,564                  |   |
| **Total Assets**                                                                            |   | $                       | 413,343 |                   | $      | 389,453 |   |
|                                                                                        |   |                    |    |                   |   |
| **Liabilities and Shareholders’ Equity**                                               |   |                    |    |                   |   |
| **Liabilities**                                                                             |   |                    |    |                   |   |
| Noninterest bearing                                                                         |   | $                       | 93,674  |                   | $      | 72,472 |   |
| Savings, NOW and money market deposits                                                      |   | 132,149                 |    | 130,309                |   |
| Other time deposits                                                                         |   | 126,052                 |    | 121,244                |   |
| Total deposits                                                                              |   | 351,875                 |    | 324,025                |   |
| Borrowed funds - short term                                                                 |   | 3,916                   |    | 7,880                  |   |
| Borrowed funds - long term                                                                  |   | 21,500                  |    | 24,500                 |   |
| Accrued interest and other liabilities                                                      |   | 3,130                   |    | 3,692                  |   |
| **Total Liabilities**                                                                       |   | 380,421                 |    | 360,097                |   |
|                                                                                        |   |                    |    |                   |   |
| **Shareholders’ Equity**                                                               |   |                    |    |                   |   |
| Common stock, $1 par value: 3,000,000  shares authorized: 1,000,000 issued in 2002 and 2001 |   | 1,000                   |    | 1,000                  |   |
| Additional paid in capital                                                                  |   | 4,500                   |    | 4,500                  |   |
| Retained earnings                                                                           |   | 29,581                  |    | 26,588                 |   |
| Treasury stock - 164,945 shares in 2002 and  2001                                           |   | (3,079                  | )       | (3,079                 | )      |
| Accumulated other comprehensive income  (loss)                                              |   | 920                     |    | 347                    |   |
| **Total Shareholders’ Equity**                                                         |   | 32,922                  |    | 29,356                 |   |
| **Total Liabilities and Shareholders’ Equity**                                         |   | $                       | 413,343 |                   | $      | 389,453 |   |

 

*See accompanying notes to consolidated financial statements*

* *

2

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**UPBANCORP,INC.**

**CONSOLIDATEDSTATEMENTS OF INCOME**

 
|                                                             |   | **For the  three months ended  September 30,** |   | **For the  nine months ended  September 30,** |   |
|------------------------------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------|--------|
| ***(Dollars in thousands, except per  share data) (Unaudited)*** |   | **2002**                                       |   | **2001**                                      |   | **2002** |   | **2001** |   |
| **Interest Income**                                              |   |                                           |   |                                          |   |   |   |   |   |
| Interest and fees on loans                                       |   | $                                              | 5,846  |                                          | $      | 6,773 |   | $ | 18,119 |   | $ | 20,101 |   |
| Interest on mortgages held-for-sale                              |   | 3                                              |   | 9                                             |   | 9 |   | 37 |   |
| Interest on federal funds sold                                   |   | 48                                             |   | 30                                            |   | 81 |   | 342 |   |
| Interest and dividends on securities                             |   |                                           |   |                                          |   |   |   |   |   |
| Taxable                                                          |   | 870                                            |   | 855                                           |   | 2,414 |   | 2,815 |   |
| Non-taxable                                                      |   | 136                                            |   | 97                                            |   | 386 |   | 279 |   |
| Total interest income                                            |   | 6,903                                          |   | 7,764                                         |   | 21,009 |   | 23,574 |   |
|                                                             |   |                                           |   |                                          |   |   |   |   |   |
| **Interest Expense**                                             |   |                                           |   |                                          |   |   |   |   |   |
| Interest on savings, NOW and money market  deposits              |   | 495                                            |   | 890                                           |   | 1,505 |   | 2,987 |   |
| Interest on other time deposits                                  |   | 1,002                                          |   | 1,937                                         |   | 3,291 |   | 6,833 |   |
| Interest on borrowed funds - short term                          |   | 33                                             |   | 65                                            |   | 145 |   | 80 |   |
| Interest on borrowed funds - long term                           |   | 241                                            |   | 274                                           |   | 749 |   | 953 |   |
| Total interest expense                                           |   | 1,771                                          |   | 3,166                                         |   | 5,690 |   | 10,853 |   |
|                                                             |   |                                           |   |                                          |   |   |   |   |   |
| **Net Interest Income**                                          |   | 5,132                                          |   | 4,598                                         |   | 15,319 |   | 12,721 |   |
| **Provision for Loan Losses**                                    |   | 425                                            |   | 200                                           |   | 875 |   | 500 |   |
| **Net Interest Income after Provision for  Loan Losses**         |   | 4,707                                          |   | 4,398                                         |   | 14,444 |   | 12,221 |   |
|                                                             |   |                                           |   |                                          |   |   |   |   |   |
| **Noninterest Income**                                           |   |                                           |   |                                          |   |   |   |   |   |
| Service charges on deposit accounts                              |   | 371                                            |   | 383                                           |   | 1,128 |   | 1,180 |   |
| Other noninterest income                                         |   | 71                                             |   | 102                                           |   | 249 |   | 337 |   |
| Net loss on sales of loans                                       |   | (19                                            | )      | 0                                             |   | (19 | ) | 0 |   |
| Net gain on sales of other real estate  owned                    |   | 65                                             |   | 0                                             |   | 65 |   | 0 |   |
| Net gain on sales of securities                                  |   | 0                                              |   | 241                                           |   | 0 |   | 494 |   |
| Total noninterest income                                         |   | 488                                            |   | 726                                           |   | 1,423 |   | 2,011 |   |
|                                                             |   |                                           |   |                                          |   |   |   |   |   |
| **Noninterest Expense**                                          |   |                                           |   |                                          |   |   |   |   |   |
| Salaries and employee benefits                                   |   | 1,998                                          |   | 1,844                                         |   | 5,907 |   | 5,737 |   |
| Net occupancy expense                                            |   | 207                                            |   | 138                                           |   | 631 |   | 584 |   |
| Equipment expense                                                |   | 239                                            |   | 231                                           |   | 752 |   | 718 |   |
| Outside fees & services                                      |   | 234                                            |   | 229                                           |   | 725 |   | 657 |   |
| Advertising & business development  expenses                 |   | 85                                             |   | 99                                            |   | 326 |   | 308 |   |
| Supplies and postage expense                                     |   | 98                                             |   | 128                                           |   | 347 |   | 389 |   |
| Data processing expense                                          |   | 378                                            |   | 292                                           |   | 1,039 |   | 968 |   |
| Regulatory fees and insurance                                    |   | 67                                             |   | 56                                            |   | 204 |   | 220 |   |
| Other operating expense                                          |   | 296                                            |   | 420                                           |   | 842 |   | 1,133 |   |
| Total noninterest expense                                        |   | 3,602                                          |   | 3,437                                         |   | 10,773 |   | 10,714 |   |
|                                                             |   |                                           |   |                                          |   |   |   |   |   |
| **Income Before Income Taxes**                                   |   | 1,593                                          |   | 1,687                                         |   | 5,094 |   | 3,518 |   |
| Income taxes                                                     |   | 522                                            |   | 594                                           |   | 1,777 |   | 1,231 |   |
| **Net Income**                                                   |   | $                                              | 1,071  |                                          | $      | 1,093 |   | $ | 3,317 |   | $ | 2,287 |   |
|                                                             |   |                                           |   |                                          |   |   |   |   |   |
| **Basic Earnings Per Share**                                     |   | $                                              | 1.28   |                                          | $      | 1.31 |   | $ | 3.97 |   | $ | 2.74 |   |
|                                                             |   |                                           |   |                                          |   |   |   |   |   |
| **Weighted Average Shares Outstanding**                          |   | 835,055                                        |   | 835,055                                       |   | 835,055 |   | 835,055 |   |
|                                                             |   |                                           |   |                                          |   |   |   |   |   |
| **Cash Dividends Paid**                                          |   | $                                              | 108    |                                          | $      | 108 |   | $ | 324 |   | $ | 326 |   |
|                                                             |   |                                           |   |                                          |   |   |   |   |   |
| **Payout Ratio**                                                 |   | 10.08                                          | %      | 9.88                                          | %      | 9.77 | % | 14.25 | % |

 

*See accompanying notes to consolidated financial statements*

 

3

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**UPBANCORP,INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
| **For the  nine months ended September 30,*(Dollars in thousands) (Unaudited)***                    |   | **2002** |   | **2001** |   |
|-----------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| **Cash Flows from Operating Activities**                                                            |   |     |   |     |   |
| Net Income                                                                                          |   | $        | 3,317  |     | $      | 2,287 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:                  |   |     |   |     |   |
| Provision for loan losses                                                                           |   | 875      |   | 500      |   |
| Depreciation and amortization                                                                       |   | 1,022    |   | 986      |   |
| Net gain on sales of securities                                                                     |   | 0        |   | (494     | )      |
| Net gain on sales of other real estate  owned                                                       |   | (65      | )      | 0        |   |
| Net loss on sales of loans                                                                          |   | 19       |   | 0        |   |
| Change in deferred income taxes                                                                     |   | (680     | )      | (646     | )      |
| Accretion on securities, net                                                                        |   | (1,539   | )      | (478     | )      |
| Changes in assets and liabilities:                                                                  |   |     |   |     |   |
| (Increase)decrease in accrued interest  receivable and other assets                                 |   | (837     | )      | 51       |   |
| Decrease in accrued interest payable and  other liabilities                                         |   | (562     | )      | (641     | )      |
| Net cash provided by operating activities  before loan originations and sales                       |   | 1,550    |   | 1,565    |   |
| Originations of mortgages held-for-sale                                                             |   | (8,490   | )      | (10,324  | )      |
| Proceeds from sales of mortgages  held-for-sale                                                     |   | 9,134    |   | 9,647    |   |
| **Net cash provided by operating activities**                                                       |   | 2,194    |   | 888      |   |
|                                                                                                |   |     |   |     |   |
| **Cash Flows from Investing Activities**                                                            |   |     |   |     |   |
| Net (increase) decrease in federal funds  sold                                                      |   | (16,000  | )      | 7,600    |   |
| Purchases of available-for-sale and  nonmarketable equity securities                                |   | (29,900  | )      | (35,834  | )      |
| Proceeds from maturities and redemptions of  available-for-sale and nonmarketable equity securities |   | 28,467   |   | 39,435   |   |
| Proceeds from sale of available-for-sale  securities                                                |   | 0        |   | 8,722    |   |
| Proceeds from sale of other real estate  owned                                                      |   | 871      |   | 98       |   |
| Net (increase) decrease in loans                                                                    |   | 457      |   | (23,147  | )      |
| Purchases of premises and equipment                                                                 |   | (1,086   | )      | (1,061   | )      |
| **Net cash used in investing activities**                                                           |   | (17,191  | )      | (4,187   | )      |
|                                                                                                |   |     |   |     |   |
| **Cash Flows from Financing Activities**                                                            |   |     |   |     |   |
| Net increase in total deposits                                                                      |   | 27,850   |   | 1,320    |   |
| Proceeds from borrowed funds - short term                                                           |   | 3,536    |   | 49       |   |
| Payments on  borrowed funds - short term                                                       |   | (7,500   | )      | 0        |   |
| Proceeds from borrowed funds -long term                                                             |   | 0        |   | 16,500   |   |
| Payments on  borrowed funds -long term                                                         |   | (3,000   | )      | (5,000   | )      |
| Cash dividends paid                                                                                 |   | (324     | )      | (326     | )      |
| **Net cash provided by financing activities**                                                       |   | 20,562   |   | 12,543   |   |
|                                                                                                |   |     |   |     |   |
| **Net increase in cash and due from banks**                                                         |   | 5,565    |   | 9,244    |   |
| **Cash and due from banks at beginning of  period**                                                 |   | 14,736   |   | 16,319   |   |
| **Cash and due from banks at end of period**                                                        |   | $        | 20,301 |     | $      | 25,563 |   |
|                                                                                                |   |     |   |     |   |
|                                                                                                |   |     |   |     |   |
| Supplemental disclosure of cash flow  information:                                                  |   |     |   |     |   |
| Cash payments for:          Interest                   |   | $        | 6,273  |     | $      | 10,173 |   |
| Income taxes                                                                                        |   | 2,457    |   | 1,655    |   |
| Supplemental schedule of non-cash investing  activities:                                            |   |     |   |     |   |
| Other real estate acquired in settlement of  loans                                                  |   | $        | 1,335  |     | $      | 264 |   |

 

*See accompanying notes to consolidated financial statements*

 

4

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**UPBANCORP,INC.**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY**

***(Dollars in thousands, except per share data)(Unaudited)***

 
|                                                                 |   | **Common  Stock** |   | **Additional  Paid In  Capital** |   | **Retained  Earnings** |   | **Treasury  Stock** |   | **Accumulated  Other  Comprehensive  Income** |   | **Total** |   |
|----------------------------------------------------------------------|--------|-------------------|--------|----------------------------------|--------|------------------------|--------|---------------------|--------|-----------------------------------------------|--------|-----------|--------|
| **Balance, January 1, 2002**                                         |   | $                 | 1,000  |                             | $      | 4,500                  |   | $                   | 26,588 |                                          | $      | (3,079    | )      | $ | 347 |   | $ | 29,356 |   |
| Comprehensive Income:                                                |   |              |   |                             |   |                   |   |                |   |                                          |   |      |   |
| Net income for the nine months ended September 30, 2002              |   |              |   |                             |   | 3,317                  |   |                |   |                                          |   | 3,317     |   |
| Unrealized gain on securities available-for-sale, net of tax of $367 |   |              |   |                             |   |                   |   |                |   | 573                                           |   | 573       |   |
| Comprehensive Income                                                 |   |              |   |                             |   |                   |   |                |   |                                          |   | 3,890     |   |
| Cash dividends: $.39 per share                                       |   |              |   |                             |   | (324                   | )      |                |   |                                          |   | (324      | )      |
| **Balance September 30, 2002**                                       |   | $                 | 1,000  |                             | $      | 4,500                  |   | $                   | 29,581 |                                          | $      | (3,079    | )      | $ | 920 |   | $ | 32,922 |   |

 

*See accompanying notes to consolidated financial statements*

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

***(Dollars in thousands, except per share data) (Unaudited)***

 

**NOTEA: BASIS OF PRESENTATION**

 

The accompanying unauditedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America  for interim financial information and withthe instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,they do not include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America  for complete financial statements. In theopinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for fair presentation have been included.

 

Operating results of the threeand nine months ended September 30, 2002 are not necessarily indicative of theresults that may be expected for the year ended December 31, 2002. For furtherinformation, refer to the consolidated financial statements and footnotesthereto included in the Company’s annual report on Form 10-K for the year endedDecember 31, 2001.

 

Prior period amounts includedin these financial statements have been reclassified to place them on a basis consistentwith the current period’s financial statements.

 

**CurrentAccounting  Developments**

 

SFAS No. 143, Accounting forAsset Retirement Obligations, addresses financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs.  The statementrequires that the fair value of a liability for an asset retirement obligationbe recognized in the period it is incurred if a reasonable estimate of fairvalue can be made.  The associatedretirement costs are capitalized as a component  of  the carrying amount ofthe long-lived asset and allocated to expense over the useful life of theasset.  The statement is effective forfinancial statements issued for fiscal years beginning after June 15, 2002.Management does not believe the adoption of this statement will have a materialimpact on the Company’s financial statements.

 

SFAS No. 144, Accounting forthe Impairment or Disposal of Long-Lived Assets, establishes accounting andreporting standards for the impairment or disposal of long-lived assets.  This statement supersedes SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets tobe Disposed. SFAS No, 144 provides one accounting model to be used forlong-lived assets to be disposed of by sale, whether previously held for use ornewly acquired and broadens the presentation of discontinued operations toinclude more disposal transactions.  Theprovisions of SFAS 144 are effective for financial statements issued for fiscalyears beginning after December 15, 2001. The Company adopted the statement asof January 1, 2002 and the implementation of this standard did not have amaterial impact on the Company's financial statements.

 

**NOTEB: SECURITIES**

** **

**Securitiesavailable-for-sale**

 

The amortized cost and fairvalue of these are as follows at September 30 , 2002:

 
|                                |   | **Amortized  Cost** |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair  Value** |   |
|-------------------------------------|--------|---------------------|--------|------------------------------|--------|-------------------------------|--------|-----------------|--------|
| U. S. Government agencies           |   | $                   | 50,318 |                         | $      | 797                           |   | $               | 243    |   | $ | 50,872 |   |
| States and political subdivisions   |   | 11,064              |   | 958                          |   | 0                             |   | 12,022          |   |
| Mortgage-backed securities          |   | 81                  |   | 4                            |   | 0                             |   | 85              |   |
| Total debt securities               |   | 61,463              |   | 1,759                        |   | 243                           |   | 62,979          |   |
| Equity securities                   |   | 1,500               |   | 10                           |   | 18                            |   | 1,492           |   |
| Total securities available-for-sale |   | $                   | 62,963 |                         | $      | 1,769                         |   | $               | 261    |   | $ | 64,471 |   |

 

5

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**NOTEC: LOANS AND NONPERFORMING ASSETS**

The following summarizes loansat the dates indicated:

 
|                                                  |   | **Sep. 30,  2002** |    | **Dec. 31,  2001** |   |
|-------------------------------------------------------|--------|--------------------|---------|--------------------|--------|
| Commercial - Aircraft related                         |   | $                  | 33,057  |               | $      | 45,726 |   |
| Commercial - Other                                    |   | 56,123             |    | 56,453             |   |
| Secured by real estate - Construction                 |   | 76,521             |    | 65,821             |   |
| Secured by real estate - Residential (1 to  4 family) |   | 26,822             |    | 33,998             |   |
| Secured by real estate - Residential (5 or  more)     |   | 41,868             |    | 37,522             |   |
| Secured by real estate - Non-Residential              |   | 66,868             |    | 61,798             |   |
| Consumer and all other                                |   | 2,246              |    | 2,946              |   |
| Deferred loan income                                  |   | (502               | )       | (536               | )      |
| Total loans                                           |   | 303,003            |    | 303,728            |   |
| Less: Allowance for loan losses                       |   | (4,724             | )       | (4,098             | )      |
| Total loans, net of allowance for loan  losses        |   | $                  | 298,279 |               | $      | 299,630 |   |

 

The following summarizes theanalysis of the allowance for loan losses for the nine months ended:

 
|                                                  |   | **Sep. 30,  2002** |   | **Sep. 30,  2001** |   |
|-------------------------------------------------------|--------|--------------------|--------|--------------------|--------|
| Balance at beginning of year                          |   | $                  | 4,098  |               | $      | 3,817 |   |
| Charge-offs:                                          |   |               |   |               |   |
| Commercial - Other                                    |   | 140                |   | 418                |   |
| Secured by real estate - Residential (1 to  4 family) |   | 150                |   | 0                  |   |
| Secured by real estate - Residential (5 or  more)     |   | 0                  |   | 1                  |   |
| Secured by real estate - Non-Residential              |   | 0                  |   | 50                 |   |
| Consumer and all other                                |   | 28                 |   | 30                 |   |
| Total charge-offs                                     |   | 318                |   | 499                |   |
|                                                  |   |               |   |               |   |
| Recoveries:                                           |   |               |   |               |   |
| Commercial - Other                                    |   | 65                 |   | 0                  |   |
| Consumer and all other                                |   | 4                  |   | 0                  |   |
| Total recoveries                                      |   | 69                 |   | 0                  |   |
|                                                  |   |               |   |               |   |
| Net charge-offs                                       |   | (249               | )      | (499               | )      |
| Provision for loan losses                             |   | 875                |   | 500                |   |
| Balance at end of period                              |   | $                  | 4,724  |               | $      | 3,818 |   |

 

The following summarizesnonperforming assets at the dates indicated:

 
|                           |   | **Sep.30,  2002** |   | **Dec. 31,  2001** |   |
|--------------------------------|--------|-------------------|--------|--------------------|--------|
| Nonaccrual loans               |   | $                 | 7,856  |               | $      | 4,692 |   |
| Restructured loans             |   | 2                 |   | 399                |   |
| Total nonperforming loans      |   | 7,858             |   | 5,091              |   |
| Other real estate owned (OREO) |   | 529               |   | 0                  |   |
| Total nonperforming assets     |   | $                 | 8,387  |               | $      | 5,091 |   |

 

**NOTED: NOTE PAYABLE**

 

The Company had a $10 millionline of credit, a secured revolving note payable, with a correspondent bank at September30, 2002. This note has an outstanding balance of $3 million. Interest iscalculated on the basis of 3-month LIBOR plus 150 basis points with interestdue and payable quarterly (3.30% at September 30, 2002).  The expiration 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.

 

**NOTEE: EARNINGS PER SHARE**

 

Basic earnings per share arecalculated using the weighted average number of shares outstanding during eachperiod.

 

6

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| **ITEM 2.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS** |
|-------------|-------------------------------------------------------------------------------------------------|

*(Dollars in thousands, except per share data)*

 

The following is management’sdiscussion and analysis of certain significant factors which have affected theCompany’s financial condition and results of operations during the periodsincluded in the consolidated financial statements set forth in this filing.  The Company’s Form 10-Q for the quarter endedSeptember 30 ,2001 is incorporated by reference.

 

The Company operates afull-service community bank through eight banking offices and one loanproduction office in the Chicago and Phoenix metropolitan areas. Uptown’s branches in the Phoenix areaoperate under the name of Heritage Bank (“Heritage”).

 

**RESULTSOF OPERATIONS**

 

The Company’s net income forthe quarter ended September  30, 2002was $1,071, compared to $1,093 in the same period in 2001, a decrease of $22,or 2.01%. On a per share basis, earnings decreased to $1.28 in the quarter,from $1.31 in the  previous year. Thedecrease in the third quarter net income is due to the increase in provision forloan losses and the absence of securities gains, offset by the increase in netinterest income.  These are alldescribed below.

 

The Company’s net income for thenine months ended September 30, 2002 was $3,317 compared to $2,287 in 2001.  Basic earnings per share were $3.97, a 45.04%increase from last year’s $2.74. Return on average equity was 14.42%, comparedto 11.39% in the previous year, an increase of 26.60%. Return on average assetswas 1.13% for 2002, compared to .76% in 2001. Most of these increases are dueto the 18.19 % increase in net interest income in 2002.

 

**NetInterest Income**

 

The Company’s net interestincome was $15,319 for the first nine months of 2002, compared with the $12,721registered in the same period of 2001.  The decrease in yields on average earning assets, from 8.38% in2001 to 7.68% in 2002, was more than offset, by lower average rates paid on interestbearing liabilities, 2.64% in 2002, as compared to 4.72% in 2001.  The decrease in rates earned on assets waseased by an increase in loan fees earned, to $1,512 in 2002, versus $1,036 in2001.  The majority of these fees wereearned on loans with a 1 year or less term, and therefore not subject todeferral.  The single largest factor inthe decrease in interest expense was the roll-off/maturity of time depositsthat carried a significantly higher rate at issue in 2001, than is currentlyavailable for such deposits. This resulted in the higher net interest margin of5.70% in 2002, compared to the 4.58% net interest margin for 2001.

 

The following tables summarizethe Company’s average earning assets and interest bearing liabilities for boththe nine month and three month periods ended September 30, 2002 and September30, 2001.

 

**Table 1**

**Net Interest Income and Margin Analysis**

 
|                                        |   | **Nine Months Ended September 30,** |       |
|---------------------------------------------|--------|-------------------------------------|------------|
|                                        |   | **2002**                            | ** ** | **2001** |   |
|                                        |   | **Average  Balance**                |       | **Interest** |   | **Yield/  Rate** |   | **Average  Balance** |   | **Interest** |   | **Yield/  Rate** |   |
| Interest Earning Assets:                    |   |                                |       |   |   |   |   |   |   |   |   |   |   |
| Federal Funds Sold                          |   | $                                   | 6,602      |   | $ | 81 |   | 1.62 | % | $ | 9,692 |   | $ | 342 |   | 4.72 | % |
| Investment Securities:                      |   |                                |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                                     |   | 45,636                              |       | 2,341 |   | 6.86 | % | 57,340 |   | 2,724 |   | 6.35 | % |
| Nontaxable(1)                               |   | 10,321                              |       | 592 |   | 7.54 | % | 7,556 |   | 432 |   | 7.64 | % |
| Nonmarketable Equity Securities             |   | 1,855                               |       | 73 |   | 5.26 | % | 1,672 |   | 91 |   | 7.28 | % |
| Mortgages held-for-sale                     |   | 172                                 |       | 9 |   | 6.91 | % | 650 |   | 37 |   | 7.51 | % |
| Loans, net of deferred loan income(2)(3)    |   | 304,910                             |       | 18,119 |   | 7.84 | % | 301,442 |   | 20,101 |   | 8.79 | % |
| Total Interest Earning Assets               |   | $                                   | 369,496    |   | $ | 21,215 |   | 7.68 | % | $ | 378,352 |   | $ | 23,727 |   | 8.38 | % |
|                                        |   |                                |       |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Liabilities:               |   |                                |       |   |   |   |   |   |   |   |   |   |   |
| Savings, NOW & money market deposits    |   | $                                   | 128,598    |   | $ | 1,505 |   | 1.56 | % | $ | 130,761 |   | $ | 2,987 |   | 3.05 | % |
| Other Time Deposits                         |   | 129,376                             |       | 3,291 |   | 3.40 | % | 150,003 |   | 6,833 |   | 6.09 | % |
| Borrowed Funds - Short Term                 |   | 5,139                               |       | 145 |   | 3.77 | % | 3,864 |   | 80 |   | 2.73 | % |
| Borrowed Funds - Long Term                  |   | 25,310                              |       | 749 |   | 3.96 | % | 22,822 |   | 953 |   | 5.51 | % |
| Total Interest Bearing Liabilities          |   | $                                   | 288,423    |   | $ | 5,690 |   | 2.64 | % | $ | 307,450 |   | $ | 10,853 |   | 4.72 | % |
| Net interest income/interest rate spread(4) |   |                                |       | $ | 15,525 |   | 5.04 | % |   |   | $ | 12,874 |   | 3.66 | % |
| Net interest margin(5)                      |   |                                |       |   |   | 5.70 | % |   |   |   |   | 4.58 | % |

 

----

(1) - Nontaxable interest income is presented on a fully tax equivalentbasis assuming a 35% tax rate.

(2) - Nonaccrual loans are included in average loans.

(3)-  Interest income includesloan origination fees of $1,512 and $1,036 for the nine months ended September30, 2002 and 2001.

(4) - Interest rate spread represents the difference between theaverage yield on interest earning assets and the average cost of interestbearing liabilities and is presented on a fully tax equivalent basis.

(5) - Net interest margin represents net interest income as apercentage of average earning assets.

 

7

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**Table 2**

**Net Interest Income and Margin Analysis**

 
|                                        |   | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------|--------|--------------------------------------|------------|
|                                        |   | **2002**                             | ** ** | **2001** | ** ** |
|                                        |   | **Average  Balance**                 |       | **Interest** |   | **Yield/  Rate** |   | **Average  Balance** |   | **Interest** |   | **Yield/  Rate** |   |
| Interest Earning Assets:                    |   |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Federal Funds Sold                          |   | $                                    | 11,309     |   | $ | 48 |   | 1.66 | % | $ | 3,679 |   | $ | 30 |   | 3.19 | % |
| Investment Securities:                      |   |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                                     |   | 45,452                               |       | 845 |   | 7.38 | % | 51,038 |   | 827 |   | 6.43 | % |
| Nontaxable(1)                               |   | 10,816                               |       | 216 |   | 7.92 | % | 7,768 |   | 158 |   | 7.58 | % |
| Nonmarketable Equity Securities             |   | 1,873                                |       | 25 |   | 5.30 | % | 1,876 |   | 28 |   | 5.92 | % |
| Mortgages held-for-sale                     |   | 198                                  |       | 3 |   | 5.94 | % | 500 |   | 9 |   | 7.04 | % |
| Loans, net of deferred loan income(2)(3)    |   | 305,696                              |       | 5,846 |   | 7.48 | % | 310,318 |   | 6,773 |   | 8.54 | % |
| Total Interest Earning Assets               |   | $                                    | 375,344    |   | $ | 6,983 |   | 7.38 | % | $ | 375,179 |   | $ | 7,825 |   | 8.27 | % |
|                                        |   |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Liabilities:               |   |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Savings, NOW & money market deposits    |   | $                                    | 129,519    |   | $ | 495 |   | 1.52 | % | $ | 132,381 |   | $ | 890 |   | 2.67 | % |
| Other Time Deposits                         |   | 129,704                              |       | 1,002 |   | 3.06 | % | 142,448 |   | 1,937 |   | 5.39 | % |
| Borrowed Funds - Short Term                 |   | 3,408                                |       | 33 |   | 3.79 | % | 7,864 |   | 65 |   | 3.23 | % |
| Borrowed Funds - Long Term                  |   | 22,143                               |       | 241 |   | 4.26 | % | 20,756 |   | 274 |   | 5.17 | % |
| Total Interest Bearing Liabilities          |   | $                                    | 284,774    |   | $ | 1,771 |   | 2.47 | % | $ | 303,449 |   | $ | 3,166 |   | 4.14 | % |
| Net interest income/interest rate spread(4) |   |                                 |       | $ | 5,212 |   | 4.91 | % |   |   | $ | 4,659 |   | 4.13 | % |
| Net interest margin(5)                      |   |                                 |       |   |   | 5.58 | % |   |   |   |   | 4.96 | % |

 

----

(1) - Nontaxable interest income is presented on a fully tax equivalentbasis assuming a 35% tax rate.

(2) - Nonaccrual loans are included in average loans.

(3)-  Interest income includesloan origination fees of $403 and $444 for the three months ended September 30,2002 and 2001.

(4) - Interest rate spread represents the difference between theaverage yield on interest earning assets and the average cost of interestbearing liabilities and is presented on a fully tax equivalent basis.

(5) - Net interest margin represents net interest income as apercentage of average earning assets.

 

**Table 3**

**Volume and Rate Analysis of Net InterestIncome**

 
|                                       |   | **Three Months Ended  September 30, 2002  Compared to September 30, 2001** |   | **Nine Months Ended  September 30, 2002  Compared to September 30, 2001** |   |
|--------------------------------------------|--------|----------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|--------|
|                                       |   | **Change  due to:  Volume**                                                |   | **Change  due to:  Rate**                                                 |   | **Total  Change** |   | **Change  due to:  Volume** |   | **Change  due to:  Rate** |   | **Total  Change** |   |
| Interest Earning Assets:                   |   |                                                                       |   |                                                                      |   |   |   |   |   |   |   |   |   |
| Federal Funds Sold                         |   | $                                                                          | 23     |                                                                      | $      | (5 | ) | $ | 18 |   | $ | (86 | ) | $ | (175 | ) | $ | (261 | ) |
| Investment Securities:                     |   |                                                                       |   |                                                                      |   |   |   |   |   |   |   |   |   |
| Taxable                                    |   | (52                                                                        | )      | 70                                                                        |   | 18 |   | (629 | ) | 246 |   | (383 | ) |
| Nontaxable(1)                              |   | 61                                                                         |   | (3                                                                        | )      | 58 |   | 159 |   | 1 |   | 160 |   |
| Nonmarketable Equity Securities            |   | 0                                                                          |   | (3                                                                        | )      | (3 | ) | 12 |   | (30 | ) | (18 | ) |
| Mortgages held-for-sale                    |   | (5                                                                         | )      | (1                                                                        | )      | (6 | ) | (25 | ) | (3 | ) | (28 | ) |
| Loans, net of deferred loan income         |   | (99                                                                        | )      | (828                                                                      | )      | (927 | ) | 234 |   | (2,216 | ) | (1,982 | ) |
| Total Decrease in Interest Income          |   | (72                                                                        | )      | (770                                                                      | )      | (842 | ) | (335 | ) | (2,177 | ) | (2,512 | ) |
|                                       |   |                                                                       |   |                                                                      |   |   |   |   |   |   |   |   |   |
| Interest Bearing Liabilities:              |   |                                                                       |   |                                                                      |   |   |   |   |   |   |   |   |   |
| Savings, NOW & money market deposits   |   | (19                                                                        | )      | (376                                                                      | )      | (395 | ) | (49 | ) | (1,433 | ) | (1,482 | ) |
| Other Time Deposits                        |   | (160                                                                       | )      | (775                                                                      | )      | (935 | ) | (841 | ) | (2,701 | ) | (3,542 | ) |
| Borrowed Funds - Short Term                |   | (46                                                                        | )      | 14                                                                        |   | (32 | ) | 31 |   | 34 |   | 65 |   |
| Borrowed Funds - Long Term                 |   | 20                                                                         |   | (53                                                                       | )      | (33 | ) | 122 |   | (326 | ) | (204 | ) |
| Total Decrease in Interest Expense         |   | (205                                                                       | )      | (1,190                                                                    | )      | (1,395 | ) | (737 | ) | (4,426 | ) | (5,163 | ) |
| Increase/(Decrease) in Net Interest Income |   | $                                                                          | 133    |                                                                      | $      | 420 |   | $ | 553 |   | $ | 402 |   | $ | 2,249 |   | $ | 2,651 |   |

 

----

(1) - Nontaxable interestincome is presented on a fully tax equivalent basis assuming a 35% tax rate.

 

8

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**Provisionfor Loan Losses**

 

The provision for loan lossesfor the nine months ended  September 30,2002 was $875, compared to $500 in 2001, reflecting management’s assessment ofoverall risk in the loan portfolio. Net charge-offs were $249 for the firstnine months of 2002, compared to $499 during the same period in 2001. Theallowance for loan losses as a percent of total loans was 1.56% at September30, 2002, and 1.35% at December 31, 2001. Total nonperforming assets as apercent of total assets were 2.03% at September 30, 2002 and 1.31% at December31, 2001.

 

**NoninterestIncome and Expense**

 

Total noninterest income,excluding the securities gains, decreased 6.20% to $1,423 in the first ninemonths of 2002, compared to the same period in 2001, due to regular seasonalfluctuations in  client activity subjectto service charges.  The securitiesgains of $494, recognized in 2001, arose primarily because the Chicago branchheld an investment in common stock in Cash Station (an ATM consortium), thecost basis of which was $0. Cash Station entered into a merger transaction witha listed public company, Concord EFS, Inc. (Concord), whereby the shareholdersof Cash Station received common stock of Concord in exchange for their commonstock.  The fair value of the Concordstock at the merger date was $253 and is included as a part of gains onsecurities transactions in 2001.

 

Total noninterest expense forthe first nine months of 2002 increased .55% to $10,773 from the year earliertotal of $10,714. The increase in salaries and employee benefits in 2002 to$5,907 from $5,737 in 2001, is a result of higher payroll taxes and benefitspayments required. Net occupancy and equipment expense increased $81 to $1,383from $1,302 in 2001, primarily due to higher utilities cost. Other noninterestexpense decreased $192 or 5.22% to $3,483 from $3,675 in  the preceding year.

 

**FINANCIALCONDITION CHANGES**

 

Total assets were $413,343 atSeptember 30, 2002 compared to $389,453 at December 31, 2001.  The overall increase in cash and due frombanks is a function of regular deposit activity and seasonal fluctuation.  The increase in the securities portfolio is areflection of active funds management and the calendar timing of investmentmaturities and the reinvestment of those funds.  The decrease in the loan portfolio is a result of a decrease indemand.

 

Total deposits increased$27,850 or 8.60% from year-end. Noninterest bearing deposits increased 29.26%or $21,202, due to core growth, as well as seasonal fluctuations at each of thebranches. Interest bearing deposits increased $6,648 as a result of theissuance of short term, non-core, certificates of deposit purchased in 2002, atrates profitable to Uptown. Borrowed funds decreased $6,964 from year-endlevels as a result of reduced need brought about by the increased deposits.

 

9

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**Allowancefor Loan Losses**

Uptown National Bank(“Uptown”)utilizes an internal classification system as a means of reporting problem andpotential problem assets. A classified loan analysis is presentedquarterly to the Company’s Board of Directors, showing allassets listed as “Special Mention”, “Substandard”, “Doubtful” and “Loss”. Anasset is classified as Substandard” if it isinadequately protected by the current net worth and paying capacity of theobligor or of the collateral pledged, if any.Substandard assets include those characterized by the distinct possibility thatUptown will sustain some loss if the deficiencies are notcorrected. Assets classified as “Doubtful” have all the weaknessesinherent in those classified Substandard with the added characteristicthat the weaknesses present make collection or liquidation infull, on the basis of currently existing facts, conditions and values, highlyquestionable and improbable. Assets classified as “Loss” arethose considered uncollectible and viewed as nonbankable assetsworthy of charge-off. Assets which do not currently expose Uptown to sufficientrisk to warrant classification in one of the aforementionedcategories, but possess weaknesses which may or may not be out of the controlof the customer, are deemed to be “Special Mention”.

 

Uptown’s determination as tothe classification of its assets and the amount of its valuation allowances issubject to review by their primaryregulators, as well as external loan review auditors, who can order theestablishment of additional general orspecific loss allowances. The OCC, in conjunction with the other federalbanking agencies, has adopted an interagencypolicy statement on the allowance for loan losses. The policy statementprovides guidance for financial institutions on both theresponsibilities of management for the assessment and establishmentof adequate allowances and guidance for banking agency examiners to use indetermining the adequacy of general valuation guidelines.Generally, the policy statement recommends that (i) institutionshave effective systems and controls to identify, monitor and addressasset quality problems; (ii) management hasanalyzed all significant factors that affect collectibility of the portfolio ina reasonable manner; and (iii) management  has established acceptable allowanceevaluation processes that meet the objectives set forth inthe policy statement. Management believes it has established an adequateallowance for loan losses. 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 the regulators, inreviewing Uptown’s loan portfolio, will not request Uptown to materiallyincrease its allowance for loan losses at the time.Although management believes that adequate specific and general loan lossallowances have been established, actual losses aredependent upon future events and as such, further additions to the level ofspecific and general loss allowances may become necessary.

 

The aggregate principal amountof potential problem loans as of September 30, 2002 and 2001 were approximately$17.3 million and $8.0 million, respectively. This increase is comprisedprimarily of 5 credits, totalling $7.7 million.  Management has analyzed these credits and they are also includedas a part of the review process in analyzing the allowance for loan losses.  Included in these problem loan totals arenon-accrual, Special Mention,Substandard and Doubtful classifications, which represent the watch listpresented to the Board of Directors. All loansclassified as Loss have been charged-off. Loans in this category generally includeloans that are classified for regulatory purposes.

 

**NonperformingAssets**

Another measurement used bymanagement in assessing the risk inherent in the loan portfolio is the level ofnonperforming assets. Nonperforming assets consists of nonaccrual loans,restructured loans, investments and other real estate owned.Nonaccrual loans are those loans which have been determined to have reasonabledoubt as to the timely collection of interest or principal. Restructuredloans are those loans whose terms or conditions have been changedand have resulted in a negative impact on Uptown  compared to the original terms.Other real estate owned (“OREO”) represents real property which has beenacquired through foreclosure or real estatewhich Uptown has obtained possession of in satisfaction of a debt. OREO iscarried at the lower of the recorded investment value ofthe loan, or the estimated fair market value, less estimated costsof sale, of the related real estate. The majority of the balance innonaccrual loans relates to four loans, secured by realestate, totaling $5,547 to three borrowers, placed on nonaccrual status duringthe past year. These loans have been analyzed andincluded in Uptown’s measurement process when reviewing the allowance for loanlosses as performed.

 

**LIQUIDITYAND CAPITAL RESOURCES**

The maintenance of an adequatelevel of liquidity is necessary to ensure that sufficient funds are availableto meet customer’s loan demands anddeposit withdrawal requests. The banking subsidiary’s liquidity sources consist of investmentsecurities, maturing loans and other short-term investments. Liquidity can alsobe obtained through liabilities such as core deposits, borrowedfunds, certificates of deposit and public fund deposits.

 

The Company’s cash flows are composedof three classifications: cash flows from operating activities, cashflows from investing activities, and cash flows from financingactivities. Net cash provided by operating activities, consistingprimarily of earnings, was $2,194 for the nine months ended September 30,2002  and $888 for the sameperiod in 2001. A significant component in the net fluctuation of netcash provided  by or used in operating

 

10

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** **

activities is the timing of thesale of loans held-for-sale to permanent investors. Net cash used in investing activities, consistingprimarily of loan and investment funding was $17,191 and $4,187 for the ninemonths ended September 30, 2002 and 2001, respectively. Net cashprovided by financing activities, consisting of deposit growthand borrowed funds, was $20,562 and $12,543 for the nine months endedSeptember 30, 2002 and 2001.

 

At September 30, 2002,  Shareholders’ Equity was $32,922 compared to$29,356 at December 31, 2001, an increase of$3,566, or 12.15%. Accumulated other comprehensive income at September 30,increased $573 due to unrealized gains insecurities available-for-sale, net of tax. Shareholders’ Equity as a percentageof total assets at September 30, 2002 was 7.96%. The followingtable represents the Company’s consolidated regulatory capitalposition as of September 30, 2002.

 

 
| Regulatory  capital at September 30, 2002: |
|--------------------------------------------|

 
|                     |   |         |   | **Tier 1**     |   | **Total**      |   |
|--------------------------|--------|--------------|--------|----------------|--------|----------------|--------|
|                     |   | **Leverage** |   | **Risk-Based** |   | **Risk-Based** |   |
|                     |   | **Ratio**    |   | **Capital**    |   | **Capital**    |   |
| Upbancorp, Inc. ratio    |   | 8.1          | %      | 10.0           | %      | 11.3           | %      |
| Regulatory minimum ratio |   | 4.0          | %      | 4.0            | %      | 8.0            | %      |

 

The Company periodicallyreviews the funding status of its pension plan and in light of current marketconditions, it is possible that the Company may be required to record areduction in Shareholders' Equity through a charge to Other ComprehensiveIncome at year-end.

 

**FORWARDLOOKING STATEMENTS**

The preceding “ManagementDiscussion and Analysis of Financial Condition and Results of Operations” section of this Form 10-Qcontains various “forward looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Actof 1934, as amended, which represents the Company’sexpectations and beliefs concerning future events including,without limitationthe following: the Company’s efforts in retaining and expanding itscustomer base and differentiating it from its competition;the FDIC insurance premium assessments; the impact from liabilities arisingfrom legal proceedings on its financial condition;the impact of interest rates in general on the volatility of its net interestincome; the impact of policy guidelines and strategies on netinterest income based on future rate projections; theability to provide funding sources for both Uptown and the Company; thepayment of future dividends based upon Company performance andprospects; the impact of portfolio diversification and the real estate lendingand future levels of loan losses; the effect of loan growth generally onthe improvement in net interestincome; and the assessment of its provision and reserve for loan losslevels based upon future changes in the compositionof its loan portfolio, loan losses, collateral value and economic conditions.

 

The Company cautions that thesestatements are further qualified by important factors that could cause actual results to differmaterially from those set forth in the forward looking statements due tomarket, economic and otherbusiness-related risks and uncertainties affecting the realization of suchstatements. Certain of these risks anduncertainties included in such forward looking statements include, withoutlimitation, the following;dynamics of the market served in terms of competition from traditional andnontraditional financialservice providers can affect both the funding capabilities of the Company interms of deposit gathering as well as the ability tocompete for loans and generate the higher yielding assets necessary to improve net interest income; futurelegislation and action by the Federal Reserve Board may result in theimposition of costs and constraints onthe Company through higher FDIC insurance premiums, significant fluctuations in market interest rates andoperational limitations; significant fluctuations in market interest rates mayaffect the ability to reinvest proceeds from thematurities and prepayments on certain categories of securities and the overall yield of theportfolio; business expansion activities and other efforts to retain customersmay increase the need for staffing and the resultingpersonnel expense in future periods; and deviations from theassumptions used to evaluate the appropriate level of the reserve forloan losses as well as future purchases and salesof loans may affect the appropriate level of the reserve for loan losses andthereby affect future provisions.

 

Additional risks anduncertainties include: general economic or industry conditions, nationallyand/or in thecommunities in which the Company conducts business, changes in the interestrate environment, legislationor regulatory requirements, conditions of the securities markets, depositflows, cost of funds, demand forloan products, demand for financial services, competition,changes in thequality or composition of the Company’s loan andinvestment portfolios, acts of war or terrorism, other economic, competitive, governmental, regulatory andtechnical factors affecting the Company’s operations, products, services and prices.

 

Accordingly, results actuallyachieved may differ materially from expected results in these statements. The Company does not undertake,and specifically disclaims, any obligation to update any forward looking statements to reflect eventsor circumstances occurring after the date of such statements.

 

 

 

11

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**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ON MARKET RISK**

 

Management, to augment staticgap analysis, uses an additional measurement tool to evaluate its asset/liabilitysensitivity, which determines exposure to changes in interest rates bymeasuring the change in net interest income as a percentage of Capital, due tochanges in rates over a one-year horizon.

 

Management measures such changeassuming an immediate and sustained parallel shift in rates of 50, 100 and 200basis points, both upward and downward.  The model uses scheduled amortization, call date or final maturityas appropriate on all non-rate sensitive assets.  The model uses repricing frequency on all variable rate assets andliabilities, it also uses a 5-year decay analysis on all non-rate sensitive deposits. Prepayment rates on fixed rate loanshave been adjusted up or down by 10% per year to incorporate historicalexperience in both an up-rate and down-rate environment.

 

Utilizing this measurementconcept, the interest rate risk of the Company, expressed as change in net interestincome as a percentage of capital (subject to a policy limit of 2.5% ofcapital) over a 1-year time horizon due to changes in interest rates is asfollows:

 
|                  |   | **Basis Point Change** |   |
|-----------------------|--------|------------------------|--------|
|                  |   | **+200**               |   | **+100** |   | **+50** |   | **-50** |   | **-100** |   | **-200** |   |
| At September 30, 2002 |   | -1.27                  | %      | -0.65 | % | -0.33 | % | 0.12 | % | 0.24 | % | -0.40 | % |
| At December 31, 2001  |   | -1.19                  | %      | -0.62 | % | -0.40 | % | -0.04 | % | -0.32 | % | -0.66 | % |

 

Based upon these analyses,management has determined that there has been no material change at September30, 2002 in interest rate risk for the Company, from the December 31, 2001calculated results.

 

**ITEM4. CONTROLS AND PROCEDURES**

 

Within the 90 days prior to thefiling date of this report, the Company’s Chief Executive Officer and ChiefFinancial Officer carried out an evaluation, with the participation of othermembers of management as they deemed appropriate, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures as contemplatedby Exchange Act Rule 13a-14 and 15d-14. Based upon, and as of the date of thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures are effective, in allmaterial respects, to ensure that the information required to be disclosed bythe Company in reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms.

 

There have been no significantchanges to the Company’s internal controls or in other factors that couldsignificantly affect these controls subsequent to the date that the internalcontrols were most recently evaluated.  Therewere no significant deficiencies or material weaknesses identified in thatevaluation and therefore, no corrective actions were taken.

 

12

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| **PART 2. -  Other Information** |
|----------------------------------|
|                             |
|                             |   |   |
| **Item 1 -**                     | **Legal Proceedings** |
|                             |   | None required |
|                             |   |   |
|                             |   |   |
| **Item 2 -**                     | **Changes in Securities** |
|                             |   | None required |
|                             |   |   |
|                             |   |   |
| **Item 3 -**                     | **Defaults upon Senior Securities** |
|                             |   | None required |
|                             |   |   |
|                             |   |   |
| **Item 4 -**                     | **Submission of Matters to a Vote of Security  Holders** |
|                             |   | None required |
|                             |   |   |
|                             |   |   |
| **Item 5 -**                     | **Other Information** |
|                             |   | None required |
|                             |   |   |
|                             |   |   |
| **Item 6 -**                     | **Exhibits and Reports on Form 8-K** |
|                             |   | None required |

 

13

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**SIGNATURES**

 

**Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, |the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.**

 
| Date:  November 8, 2002 | UPBANCORP,  INC.                                                |   |
|-------------------------|-----------------------------------------------------------------|--------|
|                    | (The Registrant)                                                |
|                    |                                                            |
|                    |                                                            |
|                    | \s\Richard  K. Ostrom                                           |
|                    | Richard K.  Ostrom                                              |
|                    | Chairman of  the Board,  President and Chief  Executive Officer |

 

14

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**CERTIFICATION PURSUANT TO 18 U.S.C. SECTION1350,**

**AS ADOPTED PURSUANT TO SECTION 302 OF THE**

**SARBANES-OXLEY ACT OF 2002**

 

I, Richard K. Ostrom, Chairman of the Board, President and ChiefExecutive Officer, certify that:

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

2.)           Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material 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 quarterly report;

3.)           Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the “EvaluationDate”); and 

c.)            presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

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

 

 

 

 

 
| November 8,  2002 |                                                           |
|-------------------|----------------------------------------------------------------|
|              |                                                           |
|              | \s\ Richard  K. Ostrom                                         |
|              | Richard K.  Ostrom                                             |
|              | Chairman of the Board,  President and

Chief Executive Officer |

 

15

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**CERTIFICATION PURSUANT TO 18 U.S.C. SECTION1350,**

**AS ADOPTED PURSUANT TO SECTION 302 OF THE**

**SARBANES-OXLEY ACT OF 2002**

 

I, Kathleen L. Harris, Senior Vice President and Chief ExecutiveOfficer , certify that:

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

2.)           Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material 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 quarterly report;

3.)           Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly 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 quarterly report;

4.)           Theregistrant’s other certifying officers and I are responsible for establishingand 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 quarterly 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 quarterly report (the “EvaluationDate”); and

c.)            presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

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

 

 

 

 

 
| November 8,  2002 |                                                |
|-------------------|-----------------------------------------------------|
|              |                                                |
|              | \s\ Kathleen  L. Harris                             |
|              | Kathleen L.  Harris,                                |
|              | Senior Vice President  and

Chief Financial Officer |

 

16

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