**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

Washington, DC 20549

**FORM 10-Q**

 

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**ýQuarterlyReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**

**For thequarterly period ended March 31, 2002**

** **

**Commission file number 01-12292**

 

 

**UPBANCORP, INC.**

(Exact name of registrant as specified in its charter)

 

 

| ** Delaware**                                             |                                                      | **36-3207297**                        |
|----------------------------------------------------------------|-----------------------------------------------------------|---------------------------------------|
| (State or other  jurisdiction ofincorporation or organization) |                                                      | (I.R.S. Employer Identification  No.) |
|                                                           |                                                      |                                  |
| **4753 N. Broadway, Chicago, Illinois**                        |                                                      | **60640**                             |
| (Address of principal  executive offices)                      |                                                      | (zip code)                            |
|                                                           | **(773) 878-2000**                                        |                                  |
|                                                           | (Registrant’s telephone  number including area code) |                                  |

 

 

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing forthe past 90 days.        Yes ý No o

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock as ofthe latestpracticable date: Eight hundred thirty five thousand fifty five (835,055)common shareswereoutstanding as of May 8, 2002.

 

 

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**UPBANCORP, INC.**

**INDEX — 10Q 3/31/02**

 

 
| Description                                                                                           |
|-------------------------------------------------------------------------------------------------------|
| Cover Page                                                                                            |
|                                                                                                  |
| 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 |
|                                                                                                  |
| Management’s  Discussion and Analysis of Financial   Condition and Results of Operations         |
|                                                                                                  |
| Quantitative  and Qualitative Disclosures on Market Risk                                              |
|                                                                                                  |
| Other Information                                                                                     |
|                                                                                                  |
| Signature Page                                                                                        |

 

2

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PART 1 — Financial Information

Item 1. Financial Statements

 

**UPBANCORP, INC.**

**CONSOLIDATED STATEMENTS OF CONDITION**

 

 
| ***(Dollars in thousands, except  share data) (Unaudited)***                                |   | **March 31,  2002** |    | **December  31, 2001** |   |
|---------------------------------------------------------------------------------------------|--------|---------------------|---------|------------------------|--------|
| **Assets**                                                                                  |   |                |    |                   |   |
| Cash and due from banks                                                                     |   | $                   | 19,493  |                   | $      | 14,736 |   |
| Securities available-for-sale                                                               |   | 54,328              |    | 60,614                 |   |
| Nonmarketable equity securities                                                             |   | 1,838               |    | 1,818                  |   |
| Mortgages held-for-sale                                                                     |   | 180                 |    | 945                    |   |
| Loans (net of allowance for loan losses of  $4,193 and $4,098 in 2002 and 2001)             |   | 307,526             |    | 299,630                |   |
| Premises and equipment, net                                                                 |   | 5,234               |    | 5,146                  |   |
| Accrued Interest  and other  assets                                                    |   | 7,075               |    | 6,564                  |   |
| **Total Assets**                                                                            |   | $                   | 395,674 |                   | $      | 389,453 |   |
|                                                                                        |   |                |    |                   |   |
| **Liabilities and Shareholders’ Equity**                                               |   |                |    |                   |   |
| **Liabilities**                                                                             |   |                |    |                   |   |
| Noninterest bearing                                                                         |   | $                   | 76,712  |                   | $      | 72,472 |   |
| Savings, NOW and money market deposits                                                      |   | 127,651             |    | 130,309                |   |
| Other time deposits                                                                         |   | 129,150             |    | 121,244                |   |
| Total deposits                                                                              |   | 333,513             |    | 324,025                |   |
| Borrowed funds- short term                                                                  |   | 24,918              |    | 24,880                 |   |
| Borrowed funds-long term                                                                    |   | 4,500               |    | 7,500                  |   |
| Accrued interest and other liabilities                                                      |   | 3,151               |    | 3,692                  |   |
| **Total Liabilities**                                                                       |   | 366,082             |    | 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                                                                           |   | 27,529              |    | 26,588                 |   |
| Treasury stock-164,945 shares in 2002 and  2001                                             |   | (3,079              | )       | (3,079                 | )      |
| Accumulated other comprehensive income (loss)                                               |   | (358                | )       | 347                    |   |
| **Total Shareholders’ Equity**                                                         |   | 29,592              |    | 29,356                 |   |
| **Total Liabilities and Shareholders’ Equity**                                         |   | $                   | 395,674 |                   | $      | 389,453 |   |

 

 

*See accompanying notes to consolidated financialstatements*

 

3

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**UPBANCORP, INC.**

**CONSOLIDATEDSTATEMENTS OF INCOME**
|                                                             | **For the  three months ended March 31,** |     |
|------------------------------------------------------------------|-------------------------------------------|----------|
| ***(Dollars in thousands, except per  share data) (Unaudited)*** |                                      | **2002** |   | **2001** | * * |
| **Interest Income**                                              |                                      |     |   |   |   |
| Interest and fees on loans                                       |                                      | $        | 6,116 |   | $ | 6,689 |   |
| Interest on mortgages held-for-sale                              |                                      | 3        |   | 15 |   |
| Interest on federal funds sold                                   |                                      | 0        |   | 127 |   |
| Interest and dividends on securities                             |                                      |     |   |   |   |
| Taxable                                                          |                                      | 763      |   | 1,079 |   |
| Non-taxable                                                      |                                      | 118      |   | 87 |   |
| Total interest income                                            |                                      | 7,000    |   | 7,997 |   |
| **Interest Expense**                                             |                                      |     |   |   |   |
| Interest on savings, NOW and money market deposits               |                                      | 492      |   | 1,144 |   |
| Interest on other time deposits                                  |                                      | 1,151    |   | 2,481 |   |
| Interest on borrowed funds                                       |                                      | 330      |   | 365 |   |
| Total interest expense                                           |                                      | 1,973    |   | 3,990 |   |
| **Net Interest Income**                                          |                                      | 5,027    |   | 4,007 |   |
| **Provision for Loan Losses**                                    |                                      | 225      |   | 150 |   |
| **Net Interest Income after Provision for Loan Losses**          |                                      | 4,802    |   | 3,857 |   |
| **Noninterest Income**                                           |                                      |     |   |   |   |
| Service charges on deposit accounts                              |                                      | 386      |   | 442 |   |
| Other noninterest income                                         |                                      | 90       |   | 116 |   |
| Net gain on sales of securities                                  |                                      | 0        |   | 253 |   |
| Total noninterest income                                         |                                      | 476      |   | 811 |   |
| **Noninterest Expense**                                          |                                      |     |   |   |   |
| Salaries and employee benefits                                   |                                      | 1,986    |   | 1,978 |   |
| Net occupancy expense                                            |                                      | 217      |   | 226 |   |
| Equipment expense                                                |                                      | 257      |   | 238 |   |
| Outside fees & services                                      |                                      | 227      |   | 191 |   |
| Advertising & business development expenses                  |                                      | 147      |   | 79 |   |
| Supplies and postage expense                                     |                                      | 118      |   | 119 |   |
| Data processing expense                                          |                                      | 325      |   | 331 |   |
| Regulatory fees and insurance                                    |                                      | 64       |   | 91 |   |
| Other operating expense                                          |                                      | 291      |   | 410 |   |
| Total noninterest expense                                        |                                      | 3,632    |   | 3,663 |   |
| **Income Before Income Taxes**                                   |                                      | 1,646    |   | 1,005 |   |
| Income taxes                                                     |                                      | 597      |   | 358 |   |
| **Net Income**                                                   |                                      | $        | 1,049 |   | $ | 647 |   |
|                                                             |                                      |     |   |   |   |
| **Basic Earnings Per Share**                                     |                                      | $        | 1.26 |   | $ | 0.77 |   |
|                                                             |                                      |     |   |   |   |
| **Weighted Average Shares Outstanding**                          |                                      | 835,055  |   | 835,055 |   |
|                                                             |                                      |     |   |   |   |
| **Cash Dividends Paid**                                          |                                      | $        | 108 |   | $ | 109 |   |
|                                                             |                                      |     |   |   |   |
| **Payout Ratio**                                                 |                                      | 10.30    | % | 16.85 | % |
|                                                                  |                                           |          |  |  |  |  |  |  |

 

 

*See accompanying notes to consolidated financialstatements*

 

4

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**UPBANCORP, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 

** **
|                                                                                                | **For the  three months ended March 31,** |     |
|-----------------------------------------------------------------------------------------------------|-------------------------------------------|----------|
| ***(Dollars in thousands) (Unaudited)***                                                            |                                      | **2002** | ** ** | **2001** |   |
| **Cash Flows from Operating Activities**                                                            |                                      |     |   |   |   |
| Net Income                                                                                          |                                      | $        | 1,049 |   | $ | 647 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:                  |                                      |     |   |   |   |
| Provision for loan losses                                                                           |                                      | 225      |   | 150 |   |
| Depreciation and amortization                                                                       |                                      | 334      |   | 320 |   |
| Net gain on sales of securities                                                                     |                                      | 0        |   | (253 | ) |
| Change in deferred income taxes                                                                     |                                      | 482      |   | 9 |   |
| Accretion on securities, net                                                                        |                                      | (432     | ) | (107 | ) |
| Originations of mortgages held-for-sale                                                             |                                      | (2,186   | ) | (3,198 | ) |
| Proceeds from sales of mortgages held-for-sale                                                      |                                      | 2,951    |   | 1,812 |   |
| Changes in assets and liabilities:                                                                  |                                      |     |   |   |   |
| Decrease in accrued interest receivable and other assets                                            |                                      | 239      |   | 297 |   |
| Increase (decrease) in accrued interest payable and other liabilities                               |                                      | (541     | ) | 575 |   |
| **Net cash provided by operating activities**                                                       |                                      | 2,121    |   | 252 |   |
|                                                                                                |                                      |     |   |   |   |
| **Cash Flows from Investing Activities**                                                            |                                      |     |   |   |   |
| Net Increase in federal funds sold                                                                  |                                      | 0        |   | (16,200 | ) |
| Purchases of available-for-sale and nonmarketable equity securities                                 |                                      | (1,439   | ) | (13,228 | ) |
| Proceeds from maturities and redemptions of  available-for-sale and nonmarketable equity securities |                                      | 7,000    |   | 22,360 |   |
| Proceeds from sale of available-for-sale securities                                                 |                                      | 0        |   | 0 |   |
| Net increase in loans                                                                               |                                      | (8,926   | ) | (2,953 | ) |
| Purchases of premises and equipment                                                                 |                                      | (417     | ) | (94 | ) |
| **Net cash used in investing activities**                                                           |                                      | (3,782   | ) | (10,115 | ) |
|                                                                                                |                                      |     |   |   |   |
| **Cash Flows from Financing Activities**                                                            |                                      |     |   |   |   |
| Net increase in total deposits                                                                      |                                      | 9,488    |   | 17,426 |   |
| Proceeds from borrowed funds                                                                        |                                      | 0        |   | 12,000 |   |
| Payments on  borrowed funds                                                                    |                                      | (2,962   | ) | (644 | ) |
| Cash dividends paid                                                                                 |                                      | (108     | ) | (109 | ) |
| **Net cash provided by financing activities**                                                       |                                      | 6,418    |   | 28,673 |   |
|                                                                                                |                                      |     |   |   |   |
| Net increase in cash and due from banks                                                             |                                      | 4,757    |   | 18,810 |   |
| Cash and due from banks at beginning of period                                                      |                                      | 14,736   |   | 16,319 |   |
| Cash and due from banks at end of period                                                            |                                      | $        | 19,493 |   | $ | 35,129 |   |
|                                                                                                |                                      |     |   |   |   |
| Supplemental disclosure of cash flow information:                                                   |                                      |     |   |   |   |
| Cash payments for:      Interest                                           |                                      | $        | 2,257 |   | $ | 3,241 |   |
| Income  taxes                                                                                       |                                      | 115      |   | 130 |   |
| Supplemental schedule of non-cash investing activities:                                             |                                      |     |   |   |   |
| Other real estate acquired in settlement of loans                                                   |                                      | $        | 805 |   | $ | 0 |   |
|                                                                                                     |                                           |          |  |  |  |  |  |  |

 

 

*See accompanying notes to consolidated financialstatements*

 

5

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**UPBANCORP, INC.**

**CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’EQUITY**

***(Dollars in thousands, except pershare 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 three monthsended March 31, 2002                        |   |             |   |                           |   | 1,049                 |   |               |   |                                       |    | 1,049     |   |
| Unrealized gain  (loss) on securitiesavailable-for-sale, net of tax of $451 |   |             |   |                           |   |                  |   |               |   | (705                                       | )       | (705      | )      |
| Comprehensive  Income                                                       |   |             |   |                           |   |                  |   |               |   |                                       |    | 344       |   |
| Cash dividends:  $.13 per share                                             |   |             |   |                           |   | (108                  | )      |               |   |                                       |    | (108      | )      |
| Purchase of  treasury stock                                                 |   |             |   |                           |   |                  |   | 0                  |   |                                       |    | 0         |   |
| **Balance  March 31, 2002**                                                 |   | $                | 1,000  |                           | $      | 4,500                 |   | $                  | 27,529 |                                       | ($3,079 | )         | ($358  | ) | $ | 29,592 |   |
|                                                                             |        |                  |        |                                |        |                       |        |                    |        |                                            |         |           |        |  |  |  |  |  |

 

*See accompanying notes to consolidated financialstatements*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

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

 

 

**NOTE A: BASIS OF PRESENTATION**

The accompanying unaudited financial statements have been prepared inaccordance with generally accepted  accounting principles forinterim financial information and with the instructions to Form 10-Q and Rule10-01of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby generally accepted accounting principles for complete financial statements.In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for fairpresentation have been included.

 

Operating results of the three months ended March 31, 2002 are notnecessarily indicative of the results that may be expectedfor the year ended December 31, 2002. For further information, refer to theconsolidated financial statements andfootnotes thereto included in the Company’s annual report on Form 10-K for theyear endedDecember 31, 2001.

 

 

6

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**NOTE B: SECURITIES**

**Securities available-for-sale**

The amortized cost and fair value of these are as follows at March 31,2002:

 
|                                |   | **Amortized Cost** |   | **Gross Unrealized Gains** |   | **Gross Unrealized Losses** |   | **Fair  Value** |   |
|-------------------------------------|--------|--------------------|--------|----------------------------|--------|-----------------------------|--------|-----------------|--------|
| U. S. Government agencies           |   | $                  | 43,044 |                       | $      | 479                         |   | $               | 901    |   | $ | 42,622 |   |
| States and political subdivisions   |   | 10,372             |   | 101                        |   | 241                         |   | 10,232          |   |
| Total debt securities               |   | 53,416             |   | 580                        |   | 1,142                       |   | 52,854          |   |
| Equity securities                   |   | 1,500              |   | 0                          |   | 26                          |   | 1,474           |   |
| Total securities available-for-sale |   | $                  | 54,916 |                       | $      | 580                         |   | $               | 1,168  |   | $ | 54,328 |   |

 

 

**NOTE C: LOANS AND NONPERFORMING ASSETS**

The following summarizes loans at the dates indicated:
|                                               |   | **March 31,2002** |    | **Dec. 31,2001** |   |
|----------------------------------------------------|--------|-------------------|---------|------------------|--------|
| Commercial-Aircraft related                        |   | $                 | 45,870  |             | $      | 45,726 |   |
| Commercial-Other                                   |   | 58,370            |    | 56,453           |   |
| Secured by real estate-Construction                |   | 74,557            |    | 65,821           |   |
| Secured by real estate-Residential (1 to 4 family) |   | 32,936            |    | 33,998           |   |
| Secured by real estate-Residential (5 or more)     |   | 38,632            |    | 37,522           |   |
| Secured by real estate-Non-Residential             |   | 59,593            |    | 61,798           |   |
| Consumer and all other                             |   | 2,280             |    | 2,946            |   |
| Deferred loan income                               |   | (519              | )       | (536             | )      |
| Total loans                                        |   | 311,719           |    | 303,728          |   |
| Less: Allowance for loan losses                    |   | (4,193            | )       | (4,098           | )      |
| Total loans, net of allowance for loan losses      |   | $                 | 307,526 |             | $      | 299,630 |   |

 

The following summarizes the analysis of the allowance for loan lossesfor the three months ended:
|                                                |   | **March 31,  2002** |   | **March 31,  2001** |   |
|-----------------------------------------------------|--------|---------------------|--------|---------------------|--------|
| Balance at beginning of year                        |   | $                   | 4,098  |                | $      | 3,817 |   |
| Charge-offs:                                        |   |                |   |                |   |
| Commercial-Other                                    |   | 30                  |   | 124                 |   |
| 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                              |   | 13                  |   | 8                   |   |
| Total charge-offs                                   |   | 193                 |   | 183                 |   |
|                                                |   |                |   |                |   |
| Recoveries:                                         |   |                |   |                |   |
| Commercial-Other                                    |   | 62                  |   | 0                   |   |
| Secured by real estate-Non-Residential              |   | 1                   |   | 0                   |   |
| Total recoveries                                    |   | 63                  |   | 0                   |   |
|                                                |   |                |   |                |   |
| Net charge-offs                                     |   | (130                | )      | (183                | )      |
| Provision for loan losses                           |   | 225                 |   | 150                 |   |
| Balance at end of period                            |   | $                   | 4,193  |                | $      | 3,784 |   |

 

7

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The following summarizes nonperforming assets at the dates indicated:
|                           |   | **March 31,  2002** |   | **Dec. 31,  2001** |
|--------------------------------|--------|---------------------|--------|--------------------|
| Nonaccrual loans               |   | $                   | 5,425  |               | $ | 4,692 |
| Restructured loans             |   | 390                 |   | 399                |
| Total nonperforming loans      |   | 5,815               |   | 5,091              |
| Other real estate owned (OREO) |   | 805                 |   | 0                  |
| Total nonperforming assets     |   | $                   | 6,620  |               | $ | 5,091 |

 

**NOTE D: NOTE PAYABLE**

The Company had a $10 million line of credit, a secured revolving notepayable, with a correspondent bank atMarch 31, 2002. This note has an outstanding balanceof $3 million. Interest is calculated on the basis of  3-month LIBORplus 150 basis points with interest due and payable quarterly (3.38% at March31, 2002). The expiration date of the line is March 1, 2003. The note also containscertain covenants which limit changes  in capital structure, thepurchase of, or merger with other banks and/or businesses, and the guarantees  of otherliabilities and obligations. In addition, the Company must meet certainfinancial ratios.

 

8

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND**

**RESULTS OF OPERATIONS**

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

 

The following is management’s discussion andanalysis of certain significant factors which have affected

the Company’s financial condition and resultsof operations during the periods included in the consolidated

financial statements set forth in thisfiling. The Company’s Form 10-Q for the quarter ended March 31, 2001

is incorporated by reference.

 

**RESULTS OFOPERATIONS**

The Company’s net income for the quarterended March 31, 2002 was $1,049, compared to $647 in the same

period in 2001, an increase of $402, or62.13%. On a per share basis, earnings increased to $1.26 in the

quarter, from $.77 in the  previous year. The improvement  in the first  quarter net income results is due to the

increase in net interest income, which isdescribed in its entirety below.

 

The Company’s net interest income was $5,027for the first three months of 2002, compared with the $4,007

registered in the same period of 2001. Thedecrease in yields on average earning assets, from 8.62% in 2001

to 7.84% in 2002, was offset and more, bylower average rates paid on deposits, 2.79% in 2002, as compared

to 5.30% in 2001. The single largest factorin this decrease was the roll-off/maturity of time deposits that

carried a significantly higher rate at issuein 2001, than is available for like term deposits in 2002. This resulted

in the higher net margin of 5.65% in 2002,compared to the 4.34% net margin for 2001.

 

The provision for loan losses was $225 in2002 and $150 in 2001, reflecting management’s assessment of

overall risk in the loan portfolio. Netcharge-offs were $130 for the first three months of 2002, compared to $183

during the same period in 2001. The allowancefor loan losses as a percent of total loans was 1.35% at

March 31, 2002, and  December 31, 2001. Total nonperforming assets as a percent oftotal assets were 1.67%

at March 31, 2002 and 1.31% at December 31,2001.

 

Total noninterest income, excluding thesecurities gains, decreased 14.70% to $476 in the first three

months of 2002, over the previous year, dueto regular seasonal fluctuations in client activity subject to

service charges. The securities gains of$253, recognized in 2001, arose because the Chicago branch held an

investment in common stock in Cash Station(an ATM consortium), the cost basis of which was $0. Cash Station

entered into a merger transaction with alisted public company, Concord EFS, Inc. (Concord), whereby the

shareholders of Cash Station received commonstock of Concord in exchange for their common stock. The fair

value of the Concord stock at the merger datewas $253 and is included as a part of gains on securities

transactions in 2001.

 

Total noninterest expense for the firstquarter of 2002 decreased .85% to $3,632 from the year earlier total

of $3,663. The increase in salaries andemployee benefits in 2002 to $1,986 from $1,978 in 2001, is a result

of higher payroll taxes and benefits paymentsrequired. Net occupancy and equipment expense increased

$10 to $474 from $464 in 2001, primarily dueto higher utilities costs. Other noninterest expense decreased

$49 or 4.01% to $1,172 from $1,221 thepreceding year.

 

9

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**FINANCIALCONDITION CHANGES**

Total assets were $395,674 at March 31, 2002compared to $389,453 at December 31, 2001. The overall

increase in cash and due from banks is afunction of regular deposit activity and seasonal fluctuation. The

decrease in the securities portfolio is areflection of active funds management and the calendar timing of

investment maturities and the reinvestment ofthose funds. The increase in the loan portfolio was funded

by investment maturities and the increase indeposits.

 

Total deposits increased $9,488 or 2.93% fromyear-end. Noninterest bearing deposits increased 5.85% or

$4,240, due to core growth, as well asseasonal fluctuations at each of the branches. Interest bearing

deposits  increased $5,248 as a result of the issuance of short termnon-core certificates of deposit

purchased in 2002, at rates profitable toUptown. Borrowed funds decreased $2,962 from year-end levels

as a result of reduced need brought about bythe increased deposits.

 

10

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The allowance for loan losses is establishedthrough a provision for loan losses charged to expense. Loans are

charged  against the allowancewhen management believes that the full collection of the loan principal isunlikely.

The level of the provision for loan losses charged to operating expenseas well as the balances maintained in the

allowance for loan losses is dependent upon many factors, includingloan growth, changes in the composition of the

loan portfolio, net charge-off levels, delinquencies, collateral valuesand management’s assessment of current and

prospective economic conditions in the Company’s primary market areas.

 

TheSubsidiary Bank measures the allowance for loan losses on a quarterly or morefrequent basis using two

measures of reserve adequacy. The first is a detailed evaluation by allloan officers of classified or non-

performing loans to ensure that an adequate allowance has beenestablished for these individual assets. The

second test measures the allowance against various loan pools, ortypes, using historical reserve percentages for

expectations of possible loan losses in each category.

 

**LIQUIDITY AND CAPITAL RESOURCES**

The maintenance of an adequate level of liquidity is necessary toensure that sufficient funds are available to meet

customer’s loan demands and deposit withdrawal requests. The bankingsubsidiary’s liquidity sources

consist of investment securities, maturing loans and other short-terminvestments. Liquidity can also be obtained

through liabilities such as core deposits, borrowed funds, certificatesof deposit and public fund deposits.

 

The Company’s cash flows are composed of three classifications: cashflows from operating activities, cash

flows from investing activities, and cash flows from financingactivities. Net cash provided by operating activities,

consisting primarily of earnings, was $2,121 for the three months endedMarch 31, 2002  and $252 for the same

period in 2001. A significant component in the net fluctuation of netcash provided  by or used in operating

activities is the timing of the sale of loans held-for-sale topermanent investors. Net cash used in investing

activities, consisting primarily of loan and investment funding was$3,782 and $10,115 for the three months

ended March 31, 2002 and 2001, respectively. Net cash provided byfinancing activities, consisting of deposit

growth and borrowed funds and note payable, was $6,418 and $28,673 forthe three months ended

March 31, 2002 and 2001, respectively.

 

At March 31, 2002,  Shareholders’Equity was $29,592 compared to $29,356 at December 31, 2001, an increase

of $236, or .80%. Accumulated other comprehensive income at March 31,decreased $705 due to unrealized

losses in securities available-for-sale, net of tax. Shareholders’Equity as a percentage of total assets at

March 31, 2002 was 7.48%. The following table represents the Company’sconsolidated regulatory capital

position as of March 31, 2002.

 

Regulatory capital at March 31, 2002:

 
|                     |   | **Leverage  Ratio** |   | **Tier 1  Risk-Based  Capital** |   | **Total  Risk-Based  Capital** |   |
|--------------------------|--------|---------------------|--------|---------------------------------|--------|--------------------------------|--------|
| Upbancorp, Inc. ratio    |   | 7.6                 | %      | 9.1                             | %      | 10.4                           | %      |
| Regulatory minimum ratio |   | 4.0                 | %      | 4.0                             | %      | 8.0                            | %      |

 

The Company operates a full-service community bank through eightbanking offices and one loan production

office in the Chicagoland area and metropolitan Phoenix area. Uptown’sbranches in the

 

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Phoenix area operateunder the name of Heritage Bank (“Heritage”).Heritage will continue to retain its name in thePhoenix area.

 

**FORWARD LOOKING STATEMENTS**

The preceding “Management Discussion and Analysis of FinancialCondition and Results of Operations”

section of this Form 10-Q contains various “forward looking statements”within the meaning of Section 27A of

the Securities Act of 1933, as amended, and section 21E of theSecurities Exchange Act of 1934, as amended,

which represents the Company’s expectations and beliefs concerningfuture events including,without

limitation, the following: the company’s efforts in retaining andexpanding its customer base and differentiating

it form its competition; the FDIC insurance premium assessments; theimpact from liabilities arising from legal

proceedings on its financial condition; the impact of interest rates ingeneral on the volatility of its net interest

income; the impact of policy guidelines and strategies on net interestincome based on future rate

projections;the ability to provide funding sources for both the Bankand the Company; the payment of future

dividends based upon Company performance and prospects; the impact ofportfolio diversification and the

real estate lending practices on future levels of loan losses; theeffect of loan growth generally on the

 

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improvement in net interest income; and theassessment of its provision and reserve for loan loss levels

basedupon future changes in the composition of its loan portfolio, loan losses,collateral value and

economic conditions.

 

TheCompany cautions that these statements are further qualified by importantfactors that could cause

actualresults to differ materially from those set forth in the forward lookingstatements due to market,

economicand other business-related risks and uncertainties affecting the realization ofsuch statements.

Certainof these risks and uncertainties included in such forward looking statementsinclude, without

limitation,the following; dynamics of the market served in terms of competition fromtraditional and

nontraditionalfinancial service providers can affect both the funding capabilities of theCompany in terms of

depositgathering as well as the ability to compete for loans and generate the higheryielding assets

necessaryto improve net interest income; future legislation and action by the FederalReserve Board may

resultin the imposition of costs and constraints on the Company through higher FDICinsurance premiums,

significantfluctuations in market interest rates and operational limitations; significantfluctuations in market

interestrates may affect the ability to reinvest proceeds from the maturities andprepayments on certain

categoriesof securities and the overall yield of the portfolio; business expansionactivities and other efforts to

retaincustomers may increase the need for staffing and the resulting personnelexpense in future periods;

anddeviations from the assumptions used to evaluate the appropriate level of thereserve for loan losses as

wellas future purchases and sales of loans may affect the appropriate level of thereserve for loan losses

and thereby affect future provisions.

 

Additionalrisks and uncertainties include; general economic or industry conditions,nationally and/or in the

communitiesin which the Company conducts business, changes in the interest rateenvironment,

legislationor regulatory requirements, conditions of the securities markets, depositflows, cost of funds,

demandfor loan products, demand for financial services, competition,changes in thequality or composition

ofthe Company’s loan and investment portfolios, acts of war or terrorism, othereconomic, competitive,

governmental,regulatory and technical factors affecting the Company’s operations, products,services and

prices.

 

Accordingly,results actually achieved may differ materially from expected results in thesestatements. The

Companydoes not undertake, and specifcally disclaims, any obligation to update anyforward looking

statementsto reflect events or circumstances occurring after the date of such statements.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ONMARKET RISK**

Management,to augment static gap analysis, uses an additional measurement tool to evaluateits

asset/liabilitysensitivity, which determines exposure to changes in interest rates bymeasuring the change

innet interest income as a percentage of Capital, due to changes in rates over aone-year horizon.

 

Managementmeasures such change assuming an immediate and sustained parallel shift inrates of 50,

100and 200 basis points, both upward and downward. The model uses scheduledamortization, call date

orfinal maturity as appropriate on all non-rate sensitive assets. The model usesrepricing frequency on

allvariable rate assets and liabilities, it also uses a 5-year decay analysis onall non-rate sensitive

deposits.Prepayment rates on fixed rate loans have been adjusted up or down by 10% peryear to

incorporate historical experience in both an up-rate and down-rateenvironment.

 

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Utilizing this measurement concept, theinterest rate risk of the Company, expressed as change in net

interestincome as a percentage of capital over a 1-year time horizon due to changes ininterest rates

is as follows:

 

 
|                 | **Basis Point Change** |
|----------------------|------------------------|
|                 |                   | **+200** |   | **+100** |   | **+50** |   | **-50** |   | **-****100** |   | **-****200** |   |
| At March 31, 2002    |                   | -1.42 | % | -0.74 | % | -0.47 | % | 0.12 | % | -0.07 | % | -0.35 | % |
| At December 31, 2001 |                   | -1.19 | % | -0.62 | % | -0.40 | % | -0.04 | % | -0.32 | % | -0.66 | % |

 

Basedupon these analyses, management has determined that there has been no materialchange at

March 31, 2002 in interest rate risk for the Company, from the December31, 2001 calculated results.

 

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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**

 

 

                               At the AnnualMeeting of Shareholders held April 16, 2002

                               theshareholders elected the following Directors:

 
|             |   | **Votes for** |   | **Votes****Against** |   | **Withheld/****Abstentions** |
|------------------|--------|---------------|--------|----------------------|--------|------------------------------|
| Delbert R. Ellis |   | 745,271       |   | 0                    |   | 164                          |
| Marvin L. Kocian |   | 744,219       |   | 0                    |   | 1,216                        |

 

**Item 5**—**              ****Other Information**

                               None required

 

**Item 6**—**              ****Exhibits and Reports on Form 8-K**

                               None required

 

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                                       **SIGNATURES**

 

**Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934,**

**the registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto**

**duly authorized.**

 

 

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

 

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