** **

**UNITED STATES**

## **SECURITIES AND EXCHANGECOMMISSION**

### **Washington, DC 20549**

 

### **FORM 10-Q**

 

**ý****Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934**

**For the quarterly period ended September 30, 2001                   Commission file number01-12292**

** **

**UPBANCORP, INC.**

(Exact name of registrant as specified in itscharter)

 

 

| **Delaware**                                                                                       | **36-3207297**                                                           |
|----------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------|
| (State or other jurisdiction of incorporation  or organization)                                    | (I.R.S. EmployerIdentification  No.)                                     |
|                                                                                               |                                                                     |
| **4753 N. Broadway, Chicago, Illinois 60640**
(Address of principal executive offices)  (zip code) | **(773) 878-2000**

(Registrant's telephone number including  area code) |

 

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filing for thepast 90 days.                      Yes  ý                     No o

 

Indicatethe number of shares outstanding of each of the issuer's classes of commonstock as of the latest practicable date: Eight hundred thirty five thousandfifty-five  (835,055) common shares wereoutstanding as of November 9, 2001

 

 

 

PART 1 -Financial Information

Item 1.Financial Statements

 

**UPBANCORP, INC.**

**CONSOLIDATED STATEMENTSOF CONDITION**

 
| ***(Unaudited)***

***(Dollars in thousands, except share data)***                            |   | **September 30,**

**2001** |    | **December 31,**

**2000** |   |
|-----------------------------------------------------------------------------------------------|--------|-----------------------------|---------|----------------------------|--------|
| **Assets**                                                                                    |   |                        |    |                       |   |
| Cash and due from banks                                                                       |   | $                           | 25,563  |                       | $      | 16,319 |   |
| Federal funds sold                                                                            |   | 5,000                       |    | 12,600                     |   |
| Securities  available-for-sale                                                                |   | 55,546                      |    | 65,517                     |   |
| Mortgages held-for-sale                                                                       |   | 677                         |    | 0                          |   |
| Loans (net of allowance  for loan losses of $3,818 and $3,817 in 2001 and 2000)               |   | 311,135                     |    | 288,488                    |   |
| Premises and equipment,  net                                                                  |   | 5,670                       |    | 5,526                      |   |
| Nonmarketable equity  securities                                                              |   | 1,797                       |    | 1,909                      |   |
| Accrued interest and  other assets                                                            |   | 6,233                       |    | 6,312                      |   |
| **Total  Assets**                                                                             |   | $                           | 411,621 |                       | $      | 396,671 |   |
|                                                                                          |   |                        |    |                       |   |
| **Liabilities  and Shareholders' Equity**                                                     |   |                        |    |                       |   |
| **Liabilities**                                                                               |   |                        |    |                       |   |
| Demand deposits,  noninterest bearing                                                         |   | $                           | 73,147  |                       | $      | 65,900 |   |
| Savings, NOW and money  market deposits                                                       |   | 135,207                     |    | 133,345                    |   |
| Other time deposits                                                                           |   | 141,514                     |    | 149,303                    |   |
| Total deposits                                                                                |   | 349,868                     |    | 348,548                    |   |
| Borrowed funds                                                                                |   | 26,398                      |    | 14,849                     |   |
| Note payable                                                                                  |   | 3,000                       |    | 3,000                      |   |
| Accrued interest and  other liabilities                                                       |   | 3,736                       |    | 4,377                      |   |
| **Total  Liabilities**                                                                        |   | 383,002                     |    | 370,774                    |   |
|                                                                                          |   |                        |    |                       |   |
| **Shareholders'  Equity**                                                                     |   |                        |    |                       |   |
| Common stock, $1 par  value: 3,000,000 shares authorized: 1,000,000 

issued in 2001 and 2000 |   | 1,000                       |    | 1,000                      |   |
| Additional paid in  capital                                                                   |   | 4,500                       |    | 4,500                      |   |
| Retained earnings                                                                             |   | 25,501                      |    | 23,540                     |   |
| Treasury stock - 164,945  shares in 2001 and 2000                                             |   | (3,079                      | )       | (3,079                     | )      |
| Accumulated other  comprehensive income (loss)                                                |   | 697                         |    | (64                        | )      |
| **Total  Shareholders' Equity**                                                               |   | 28,619                      |    | 25,897                     |   |
| **Total  Liabilities and Shareholders' Equity**                                               |   | $                           | 411,621 |                       | $      | 396,671 |   |

* *

*See accompanying notes to unaudited consolidated financial statements*

* *

 

 

**UPBANCORP, INC.**

**CONSOLIDATED STATEMENTSOF INCOME**

 
| **For the three and nine months ended September 30,**          |   | **For the three months ended**

**September  30,** |   | **For the  nine months ended**

**September  30,** |   |
|----------------------------------------------------------------|--------|----------------------------------------------------|--------|----------------------------------------------------|--------|
| ***(Dollars in thousands, except per share data)(Unaudited)*** |   | **2001**                                           |   | **2000**                                           |   | **2001** |   | **2000** |     |
| **Interest  Income**                                           |   |                                               |   |                                               |   |   |   |   |   |
| Interest and fees on  loans                                    |   | $                                                  | 6,773  |                                               | $      | 7,012 |   | $ | 20,101 |   | $ | 19,089 |   |
| Interest on mortgages  held-for-sale                           |   | 9                                                  |   | 0                                                  |   | 37 |   | 0 |   |
| Interest on federal  funds sold                                |   | 30                                                 |   | 240                                                |   | 342 |   | 318 |   |
| Interest and dividends  on securities                          |   |                                               |   |                                               |   |   |   |   |   |
| Taxable                                                        |   | 855                                                |   | 697                                                |   | 2,815 |   | 2,029 |   |
| Non-taxable                                                    |   | 97                                                 |   | 99                                                 |   | 279 |   | 296 |   |
| Total interest income                                          |   | 7,764                                              |   | 8,048                                              |   | 23,574 |   | 21,732 |   |
|                                                           |   |                                               |   |                                               |   |   |   |   |   |
| **Interest  Expense**                                          |   |                                               |   |                                               |   |   |   |   |   |
| Interest on savings, NOW  and money market deposits            |   | 890                                                |   | 1,221                                              |   | 2,987 |   | 3,057 |   |
| Interest on other time  deposits                               |   | 1,937                                              |   | 1,947                                              |   | 6,833 |   | 4,589 |   |
| Interest on borrowed  funds                                    |   | 298                                                |   | 437                                                |   | 883 |   | 1,316 |   |
| Interest on note payable                                       |   | 41                                                 |   | 43                                                 |   | 150 |   | 63 |   |
| Total interest expense                                         |   | 3,166                                              |   | 3,648                                              |   | 10,853 |   | 9,025 |   |
|                                                           |   |                                               |   |                                               |   |   |   |   |   |
| **Net  Interest Income**                                       |   | 4,598                                              |   | 4,400                                              |   | 12,721 |   | 12,707 |   |
| **Provision  for Loan Losses**                                 |   | 200                                                |   | 150                                                |   | 500 |   | 485 |   |
|                                                           |   |                                               |   |                                               |   |   |   |   |   |
| **Net  Interest Income after Provision for Loan Losses**       |   | 4,398                                              |   | 4,250                                              |   | 12,221 |   | 12,222 |   |
|                                                           |   |                                               |   |                                               |   |   |   |   |   |
| **Noninterest  Income**                                        |   |                                               |   |                                               |   |   |   |   |   |
| Service charges on  deposit accounts                           |   | 383                                                |   | 336                                                |   | 1,180 |   | 1,257 |   |
| Other noninterest income                                       |   | 102                                                |   | 95                                                 |   | 337 |   | 326 |   |
| Net gains (losses) on  sale of loans                           |   | 0                                                  |   | 12                                                 |   | 0 |   | 39 |   |
| Net gains (losses) on  securities transactions                 |   | 241                                                |   | 0                                                  |   | 494 |   | 0 |   |
| Total noninterest income                                       |   | 726                                                |   | 443                                                |   | 2,011 |   | 1,622 |   |
|                                                           |   |                                               |   |                                               |   |   |   |   |   |
| **Noninterest  Expense**                                       |   |                                               |   |                                               |   |   |   |   |   |
| Salaries and employee  benefits                                |   | 1,844                                              |   | 2,010                                              |   | 5,737 |   | 5,928 |   |
| Net occupancy expense                                          |   | 138                                                |   | 133                                                |   | 584 |   | 467 |   |
| Equipment expense                                              |   | 231                                                |   | 261                                                |   | 718 |   | 710 |   |
| Outside fees &  services                                   |   | 229                                                |   | 205                                                |   | 657 |   | 689 |   |
| Advertising &  business development expenses               |   | 99                                                 |   | 88                                                 |   | 308 |   | 242 |   |
| Supplies and postage  expense                                  |   | 128                                                |   | 97                                                 |   | 389 |   | 372 |   |
| Data processing expense                                        |   | 292                                                |   | 288                                                |   | 968 |   | 797 |   |
| Regulatory fees and  insurance                                 |   | 56                                                 |   | 95                                                 |   | 220 |   | 192 |   |
| Other operating expense                                        |   | 420                                                |   | 338                                                |   | 1,133 |   | 1,151 |   |
| Total noninterest  expense                                     |   | 3,437                                              |   | 3,515                                              |   | 10,714 |   | 10,548 |   |
|                                                           |   |                                               |   |                                               |   |   |   |   |   |
| **Income  Before Income Taxes**                                |   | 1,687                                              |   | 1,178                                              |   | 3,518 |   | 3,296 |   |
| Income taxes                                                   |   | 594                                                |   | 404                                                |   | 1,231 |   | 1,152 |   |
| **Net  Income**                                                |   | $                                                  | 1,093  |                                               | $      | 774 |   | $ | 2,287 |   | $ | 2,144 |   |
|                                                           |   |                                               |   |                                               |   |   |   |   |   |
| **Basic  Earnings Per Share**                                  |   | $                                                  | 1.31   |                                               | $      | 0.93 |   | $ | 2.74 |   | $ | 2.56 |   |
|                                                           |   |                                               |   |                                               |   |   |   |   |   |
| **Weighted  Average Shares Outstanding**                       |   | 835,055                                            |   | 836,146                                            |   | 835,055 |   | 836,867 |   |
|                                                           |   |                                               |   |                                               |   |   |   |   |   |
| **Cash  Dividends Paid**                                       |   | $                                                  | 108    |                                               | $      | 109 |   | $ | 217 |   | $ | 326 |   |
|                                                           |   |                                               |   |                                               |   |   |   |   |   |
| **Payout  Ratio**                                              |   | 9.88                                               | %      | 14.08                                              | %      | 9.49 | % | 15.21 | % |

* *

*See accompanying notes to unaudited consolidated financial statements*

 

 

**UPBANCORP, INC.**

**CONSOLIDATED STATEMENTSOF CASH FLOWS**

 
| **For the nine months ended September 30,*(Dollars in thousands, except per share  data)(Unaudited)*** |          | **2001** |   | **2000** |     |
|--------------------------------------------------------------------------------------------------------|---------------|----------|--------|----------|---------------|
| **Cash Flows from Operating Activities**                                                               |          |     |   |     |          |
| Net  Income                                                                                            |          | $        | 2,287  |     | $             | 2,144 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities:                     |          |     |   |     |          |
| Provision for loan  losses                                                                             |          | 500      |   | 485      |          |
| Depreciation and  amortization                                                                         |          | 986      |   | 968      |          |
| Net (gain) loss on sale  of securities                                                                 |          | (494     | )      | 0        |          |
| Net (gain) loss on sale  of mortgage loans                                                             |          | 0        |   | 0        |          |
| Change in deferred  income taxes                                                                       |          | (646     | )      | (113     | )             |
| Amortization (Accretion)  on securities, net                                                           |          | (478     | )      | (219     | )             |
| Originations of  mortgages held-for-sale                                                               |          | (10,324  | )      | (938     | )             |
| Proceeds from sales of  mortgages held-for-sale                                                        |          | 9,647    |   | 2,202    |          |
| Changes in assets and  liabilities:                                                                    |          |     |   |     |          |
| (Increase) decrease in  accrued interest receivable and other assets                                   |          | 51       |   | (337     | )             |
| Increase (decrease) in  accrued interest payable and other liabilities                                 |          | (641     | )      | 295      |          |
| **Net cash provided by (used in) operating activities**                                                |          | 888      |   | 4,487    |          |
|                                                                                                   |          |     |   |     |          |
| **Cash Flows from Investing Activities**                                                               |          |     |   |     |          |
| Net (increase) decrease  in federal funds sold                                                         |          | 7,600    |   | (6,770   | )             |
| Purchases of  available-for-sale securities                                                            |          | (35,752  | )      | (27,308  | )             |
| Proceeds from maturities  and redemptions of available-for-sale securities                             |          | 39,241   |   | 0        |          |
| Proceeds from sale of  available-for-sale securities                                                   |          | 8,722    |   | 0        |          |
| Net (increase) decrease  in loans                                                                      |          | (23,147  | )      | (42,054  | )             |
| Proceeds from sale of  other real estate                                                               |          | 98       |   | 0        |          |
| Purchases of premises  and equipment                                                                   |          | (1,061   | )      | (681     | )             |
| Proceeds from  redemptions of nonmarketable equity securities                                          |          | 194      |   | 0        |          |
| Purchases of  nonmarketable equity securities                                                          |          | (82      | )      | (568     | )             |
| **Net cash provided by (used in) investing activities**                                                |          | (4,187   | )      | (77,381  | )             |
|                                                                                                   |          |     |   |     |          |
| **Cash Flows from Financing Activities**                                                               |          |     |   |     |          |
| Net increase (decrease)  in total deposits                                                             |          | 1,320    |   | 83,457   |          |
| Net increase (decrease)  in borrowed funds                                                             |          | 11,549   |   | (2,470   | )             |
| Net increase (decrease)  in note payable                                                               |          | 0        |   | 3,000    |          |
| Cash dividends paid                                                                                    |          | (326     | )      | (326     | )             |
| Purchase of treasury  stock                                                                            |          | 0        |   | (33      | )             |
| **Net cash provided by (used in) financing activities**                                                |          | 12,543   |   | 83,628   |          |
|                                                                                                   |          |     |   |     |          |
| Net  increase (decrease) in cash and due from banks                                                    |          | 9,244    |   | 10,734   |          |
| Cash  and due from banks at beginning of period                                                        |          | 16,319   |   | 11,526   |          |
| Cash  and due from banks at end of period                                                              |          | $        | 25,563 |     | 22,260        |   |
|                                                                                                   |          |     |   |     |          |
| Supplemental  disclosure of cash flow information:                                                     |          |     |   |     |          |
| Cash payments for:                                                                                     | Interest      |     | $      | 10,173   |          | 8,774 |   |
|                                                                                                   | Income  taxes |     | 1,655  |     | 1,440         |   |
|                                                                                                   |          |     |   |     |          |
| Supplemental  schedule of non-cash investing activities:                                               |          |     |   |     |          |
| Other real estate acquired  in settlement of loans                                                     |          | $        | 264    |     | $             | 0 |   |
|                                                                                                        |               |          |        |          |               |  |  |  |  |

* *

* *

*See accompanying notes to unaudited consolidated financial statements*

 

 

**UPBANCORP, INC.**

**CONSOLIDATED STATEMENTSOF 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,  2001**                                                    |   | $                     | 1,000  |                           | $      | 4,500                 |   | $                  | 23,540 |                                       | $      | (3,079    | )      | $ | (64 | ) | $ | 25,897 |   |
| Comprehensive Income:                                                            |   |                  |   |                           |   |                  |   |               |   |                                       |   |      |   |
| Net income for the nine months ended September 30, 2001                          |   |                  |   |                           |   | 2,287                 |   |               |   |                                       |   | 2,287     |   |
| Unrealized gain (loss) on securities available-for-sale, net of tax  of $472     |   |                  |   |                           |   |                  |   |               |   | 735                                        |   | 735       |   |
| Reclassification adjustment for gains realized in net income, net of  tax of $15 |   |                  |   |                           |   |                  |   |               |   | 26                                         |   | 26        |   |
| Comprehensive Income                                                             |   |                  |   |                           |   |                  |   |               |   |                                       |   | 3,048     |   |
| Cash dividends: $.39 per share                                                   |   |                  |   |                           |   | (326                  | )      |               |   |                                       |   | (326      | )      |
| **Balance September 30,  2001**                                                  |   | $                     | 1,000  |                           | $      | 4,500                 |   | $                  | 25,501 |                                       | $      | (3,079    | )      | $ | 697 |   | $ | 28,619 |   |

 

*See accompanying notes to unaudited consolidated financial statements*

 

 

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

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

 

**NOTE A:SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**Basis ofpresentation **

The accompanying unauditedfinancial statements have been prepared in accordance with generally accepted accountingprinciples in the United States of America for interim financial informationand with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby generally accepted accounting principles in the United States of America forcomplete financial statements. In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for fairpresentation have been included.

 

Operating results of thethree and nine months ended September 30, 2001 are not necessarily indicativeof the results that may be expected for the year ended December 31, 2001. Forfurther information, refer to the consolidated financial statements andfootnotes thereto included in the Company's annual report on Form 10-K for theyear ended December 31, 2000.

 

Prior period's amountsincluded in these financial statements have been reclassified to place them ona basis consistent with the current period'sfinancial statements.

 

###### **EmergingAccounting Standards**

In October 2001, the FASBissued Statement No. 144, "Accounting for the Impairment or Disposal ofLong-Lived Assets" (SFAS 144). This statement addresses the financialaccounting and reporting for the impairment or disposal of long-lived assetsand supersedes SFAS No. 121, "Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to be Disposed Of", and the accountingand reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reportingthe Effects of Disposal of a Segment of a Business and Extraordinary, Unusualand Infrequently Occurring Events and Transactions", for the disposal of asegment of a business (as previously defined in that Opinion). SFAS 144 alsoamends ARB No. 51, "Consolidated Financial Statements", to eliminatethe exception to consolidation for a subsidiary for which control is likely tobe temporary. The provisions of this Statement are effective for financialstatements issued for fiscal years beginning after December 15, 2001.Management does not anticipate that the adoption of this Statement will have asignificant effect on the Company's financial statements.

 

In August 2001, the FASBissued Statement No. 143, "Asset Retirement Obligations". ThisStatement addresses financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs. SFAS 143 applies to legal obligations associated withthe retirement of long-lived assets that result from the acquisition,construction, development and(or) the normal operations of a long-lived asset, exceptfor certain obligations of lessees. As used in this statement, a legal obligationis an obligation that a party is required to settle as a result of an existingor enacted law, statute, ordinance, or written or oral contract or by legal constructionof a contract under the doctrine of promissory estoppel. This statement amendsSFAS No. 19, "FinancialAccounting andReporting by Oil and Gas Producing Companies" and is effective forfinancial statements issued for fiscal yearsbeginning after June 15, 2002. Management does not anticipate that the adoptionof this Statement will have a significant effect on the Company'sfinancial statements.

 

In July 2001, the FASBissued Statement No. 141, "Business Combinations" (SFAS 141) andStatement No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).SFAS No. 141 addresses financial accounting and reporting for businesscombinations and is effective for all business combinations initiated afterJune 30, 2001. SFAS No. 142 addresses financial and reporting for acquiredgoodwill and other intangible assets and is effective for fiscal years beginningafter December 15, 2001. The Company has not yet quantified the impact ofadopting these statements on its financial position or results ofoperations.

 

 

**NOTE B:SECURITIES**

###### **Securitiesavailable-for-sale**

The amortized cost andfair value of these are as follows at September 30, 2001:
|                                 |   | **Amortized**

**Cost** |   | **Gross**

**Unrealized**

**Gains** |   | **Gross**

**Unrealized**

**Losses** |   | **Fair**

**Value** |   |
|--------------------------------------|--------|-------------------------|--------|--------------------------------------|--------|---------------------------------------|--------|---------------------|--------|
| U. S. Treasury  Securities           |   | $                       | 150    |                                 | $      | 0                                     |   | $                   | 0      |   | $ | 150 |   |
| U. S. Government  agencies           |   | 45,119                  |   | 1,086                                |   | 79                                    |   | 46,126              |   |
| States and political subdivisions    |   | 7,634                   |   | 239                                  |   | 69                                    |   | 7,804               |   |
| Mortgage-backed  securities          |   | 0                       |   | 0                                    |   | 0                                     |   | 0                   |   |
| Total debt securities                |   | 52,903                  |   | 1,325                                |   | 148                                   |   | 54,080              |   |
| Equity securities                    |   | 1,500                   |   | 0                                    |   | 34                                    |   | 1,466               |   |
| Total securities  available-for-sale |   | $                       | 54,403 |                                 | $      | 1,325                                 |   | $                   | 182    |   | $ | 55,546 |   |

 

 

** **

** **

**NOTE C:LOANS AND NONPERFORMING ASSETS**

The following summarizes loans at the datesindicated:
|                                                  |   | **Sep. 30,**

**2001** |    | **Dec. 31,**

**2000** |   |
|-------------------------------------------------------|--------|------------------------|---------|------------------------|--------|
| Commercial - Aircraft  related                        |   | $                      | 56,053  |                   | $      | 54,614 |   |
| Commercial - Other                                    |   | 61,721                 |    | 58,404                 |   |
| Secured by real estate -  Construction                |   | 67,930                 |    | 52,637                 |   |
| Secured by real estate -  Residential (1 to 4 family) |   | 34,290                 |    | 32,431                 |   |
| Secured by real estate -  Residential (5 or more)     |   | 33,252                 |    | 30,264                 |   |
| Secured by real estate -  Non-Residential             |   | 58,453                 |    | 58,467                 |   |
| Consumer and all other                                |   | 3,753                  |    | 5,986                  |   |
| Deferred loan fees, net                               |   | (499                   | )       | (498                   | )      |
| Total loans                                           |   | 314,953                |    | 292,305                |   |
| Less: Allowance for loan  losses                      |   | (3,818                 | )       | (3,817                 | )      |
| Total loans,  net of allowance for loan losses        |   | $                      | 311,135 |                   | $      | 288,488 |   |
|                                                       |        |                        |         |                        |        |  |  |  |  |

 

Thefollowing summarizes the analysis of the allowance for loan losses for the ninemonths ended:

 
|                                                       |   | **Sep. 30,**

**2001** |   | **Sep. 30,**

**2000** |   |
|------------------------------------------------------------|--------|------------------------|--------|------------------------|--------|
| Balance at beginning of  year                              |   | $                      | 3,817  |                   | $      | 3,114 |   |
| Charge-offs:                                               |   |                   |   |                   |   |
| Commercial – Other                                    |   | 418                    |   | 8                      |   |
| Secured by real estate –  Residential (5 or more)     |   | 1                      |   | 0                      |   |
| Secured by real estate –  Non-Residential             |   | 55                     |   | 0                      |   |
| Consumer and all other                                     |   | 25                     |   | 1                      |   |
| Total charge-offs                                          |   | 499                    |   | 9                      |   |
|                                                       |   |                   |   |                   |   |
| Recoveries:                                                |   |                   |   |                   |   |
| Commercial – Other                                    |   | 0                      |   | 11                     |   |
| Secured by real estate –  Residential (1 to 4 family) |   | 0                      |   | 3                      |   |
| Consumer and all other                                     |   | 0                      |   | 3                      |   |
| Total recoveries                                           |   | 0                      |   | 17                     |   |
|                                                       |   |                   |   |                   |   |
| Net recoveries  (charge-offs)                              |   | (499                   | )      | 8                      |   |
| Provision for loan  losses                                 |   | 500                    |   | 485                    |   |
| Balance at end of period                                   |   | $                      | 3,818  |                   | $      | 3,607 |   |

 

Thefollowing summarizes nonperforming assets at the dates indicated:
|                            |   | **Sep. 30,**

**2001** |   | **Dec. 31,**

**2000** |   |
|---------------------------------|--------|------------------------|--------|------------------------|--------|
| Nonaccrual loans                |   | $                      | 5,850  |                   | $      | 1,299 |   |
| Restructured loans              |   | 404                    |   | 422                    |   |
| Total nonperforming  loans      |   | 6,254                  |   | 1,721                  |   |
| Other real estate owned  (OREO) |   | 166                    |   | 0                      |   |
| Total nonperforming  assets     |   | $                      | 6,420  |                   | $      | 1,721 |   |

 

 

 

**NOTE D:NOTE PAYABLE**

The Company had a $5million line of credit, a secured revolving note payable, with a correspondentbank at September 30, 2001. This note has anoutstanding balance of $3 million. Interest is calculated on the basis of 3-monthLIBOR plus 150 basis points with interest due and payable quarterly (4.10% atSeptember 30, 2001). The expiration date of the line is April 1, 2002. The note alsocontains certain covenants which limit changes in capital structure, thepurchase of, or merger with other banks and/or businesses, and the guarantees ofother liabilities and obligations. In addition, the Company must meet certainfinancial ratios. The Company was in compliance with all covenants of theagreement at September 30, 2001.

 

 

**ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS ON FINANCIAL CONDITION AND**

**RESULTS OF OPERATIONS**

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

 

Thefollowing is management's discussion and analysis of certain significantfactors which have affected the Company's financial condition and results ofoperations during the periods included in the consolidated financial statementsset forth in this filing. The Company's Form 10-Q for the quarter endedSeptember 30, 2000 is incorporated by reference.

 

**RESULTS OF OPERATIONS**

TheCompany's net income for quarter ended September 30, 2001 was $1,093, comparedto $774 in the same period in 2000, an increase of $314, or 41.21%. On a pershare basis, earnings increased to $1.31 in the quarter, from $.93 in the  previous year. The increase in the thirdquarter net income results is due primarily to Securities Gains, which isdescribed in its entirety below.

 

TheCompany's net income for the nine months ended September 30, 2001 was $2,287compared to $2,144 in 2000. Basic earnings per share was $2.74, a 7.03%increase from last year's $2.56. Return on average equity was 11.39% in 2001compared to 11.74% in 2000, a 2.98% decrease. Return on average assets was .76%for 2001 compared to .82% in the previous year, a 7.31% decrease, due in partto the 3.77% increase in assets and the decrease in our interest margin.

 

TheCompany's net interest income was $12,721 for the first nine months of 2001,compared with the $12,707 registered in the same period of 2000. The increasein average earning assets was effectively neutralized by a lower net margin of4.58% in 2001 as compared to 5.26% for 2000, as average rates paid on deposits increased .16 percentage points, while rates earned on loans decreased .51 percentagepoints. The results for the first nine months of 2001, when compared to thesame period in 2000, reflect a greater reliance on  time deposits to continue funding the growth in the loanportfolio, particularly in construction related real estate lending.

 

Theprovision for loan losses was $500 in 2001 and $485 in 2000, reflectingmanagement's assessment of overall risk in the loan portfolio. Net charge-offswere $499 for the first nine months of 2001, compared to $8 in net recoveriesduring the same period in 2000. The allowance for loan losses as a percent oftotal loans was 1.21% at September 30, 2001 and 1.31% at December 31, 2000.Total nonperforming assets as a percent of total assets were 1.56% at September30, 2001 and .43% at December 31, 2000.

 

Totalnoninterest income, excluding securities gains of $494, decreased 6.47% to$1,517, for the first nine months of 2001 over the previous year, due toregular seasonal fluctuations in  clientactivity subject to service charges. Securities gains of $452, of the $494total, arose because the Chicago branch held an investment in common stock inCash Station (an ATM consortium), the cost basis of which was $0. Cash Stationentered into a merger transaction with a listed public company, Concord EFS,Inc. (Concord), whereby the shareholders of Cash Station received common stockof Concord in exchange for their common stock. The fair value of the

Concordstock at the merger date was $253 and is included as a part of gains onsecurities transactions.  The stock wassold in the third quarter and the remaining $199 recognized at that time.

 

Totalnoninterest expense for the first nine months of 2001 increased 1.57% to$10,714 from the year earlier total of $10,548. The decrease in salaries andemployee benefits in 2001 to $5,737 from $5,928 in 2000, is a direct result ofheavier staffing needs at start-up for the new Chicago branches, due totraining expenses, temporary help, etc., required for the initial push in 2000,than were required in 2001. Net occupancy and equipment expense increased $125to $1,302 from $1,177 in 2000, due primarily to full period rental and other relatedexpenses at the new Chicago branches, as well as higher maintenance costs atthe main Chicago branch. Other noninterest expense increased 6.74% to $3,675 inthe first three quarters of 2001 from $3,443 in the comparable 2000 period, dueprimarily to one-time merger related data processing costs.

 

**FINANCIAL CONDITION CHANGES**

Totalassets were $411,621 at September 30, 2001 compared to $396,671 at December 31,2000. The overall increase in cash and due from banks and federal funds soldare a function of regular deposit activity and seasonal fluctuation. Thedecrease in the securities portfolio is a reflection of active funds managementand the calendar timing of investment maturities and sales and the reinvestmentof those funds. The increase in the loan portfolio was funded by investmentsales and maturities and greater use of borrowed funds.

 

Totaldeposits increased $1,320 or .38% from year-end. Noninterest bearing depositsincreased 11% or $7,247, due to core growth, as well as seasonal fluctuationsat each of the branches. Interest bearing deposits decreased $5,927 as a resultof high volatility Certificates of Deposit purchased in 2000, and not renewedat Uptown's currently offered rates. Borrowed funds increased $11,549 fromyear-end levels as a result of a leveraging strategy employed by the Company.

 

Theallowance for loan losses is established through a provision for loan lossescharged to expense. Loans are charged against the allowance when management believes that the full collectionof the loan principal is unlikely The level of the provision for loan lossescharged to operating expense as well as the balances maintained in the allowancefor loan losses is dependent upon many factors, including loan growth, changesin the composition of the loan portfolio, net charge-off levels, delinquencies,collateral values and management's assessment of current and prospectiveeconomic conditions in the Company's primary market areas.

 

TheSubsidiary Bank measures the allowance for loan losses on a quarterly or morefrequent basis using three measures of reserve adequacy. the first measurementcompares the allowance as a percentage of the total loan, the second testmeasures the allowance against various loan pools, or types, using historicalreserve percentages for expectations of possible loan losses in each category.The third is a detailed evaluation by all loan officers of classified ornonperforming loans to ensure that an adequate allowance has been establishedfor these individual assets.

 

The allowance for loan losses iscomprised of both allocated and unallocated allowances in order to quantifyfuture loss potential.  The allocatedposition represents management's assessment as to potential loss exposure basedon both actual loan losses experienced historically and independent creditratings on individual credits.  Theunallocated portion is that which is not specifically allocated to a particularloan or general loan category.

 

**LIQUIDITY AND CAPITAL RESOURCES**

Themaintenance of an adequate level of liquidity is necessary to ensure thatsufficient funds are available to meet customer's loan demands and depositwithdrawal requests. The banking subsidiary's liquidity sources consist ofinvestment securities, maturing loans and other short-term investments.Liquidity can also be obtained through liabilities such as core deposits,borrowed funds, certificates of deposit and public fund deposits.

 

TheCompany's cash flows are composed of three classifications: cash flows fromoperating activities, cash flows from investing activities, and cash flows fromfinancing activities. Net cash provided by operating activities, consistingprimarily of earnings, was $981 for the nine months ended September 30, 2001and $4,487 for the same period in 2000. A significant component in the netfluctuation of net cash provided  by orused in operating activities is the timing of the sale of loans held-for-saleto permanent investors. Net cash used in investing activities, consistingprimarily of loan and investment funding was $4,279 and $77,381 for the nine monthsended September 30, 2001 and 2000, respectively. Net cash provided by financingactivities, consisting of deposit growth and increased borrowed funds and notepayable, was $12,543 and $83,628 for the nine months ended September 30, 2001and 2000, respectively.

 

AtSeptember 30, 2001,  Shareholders'Equity was $28,619 compared to $25,897 at December 31, 2000, an increase of$2,722, or 10.51%. Accumulated other comprehensive income at September 30,increased $761 due to unrealized gains in securities available-for-sale, net oftax. Shareholders' Equity as a percentage of total assets at September 30, 2001was 6.95%. The following table represents the Company's consolidated regulatorycapital position as of September 30, 2001.

 

Regulatorycapital at September 30, 2001:

 
|                     |   | **Leverage  Ratio** |   | **Tier 1  Risk-Based  Capital** |   | **Total  Risk-Based  Capital** |   |
|--------------------------|--------|---------------------|--------|---------------------------------|--------|--------------------------------|--------|
| Upbancorp, Inc. ratio    |   | 6.8                 | %      | 8.3                             | %      | 9.4                            | %      |
| Regulatory minimum ratio |   | 4.0                 | %      | 4.0                             | %      | 8.0                            | %      |

 

TheCompany operates a full-service community bank through eight banking officesand one loan production

officein the Chicagoland area and metropolitan Phoenix area. Uptown's branches in thePhoenix area operate under

thename of Heritage Bank ("Heritage"). Heritage will continue to retainits name in the Phoenix area.

 

 

**FORWARD LOOKING STATEMENTS**

Statementsmade about the Company's future economic performance, strategic plans orobjectives, revenue or

earningsprojections, or other financial items and similar statements are not guaranteesof future performance,

butare forward looking statements. By their nature, these statements are subjectto numerous uncertainties that

couldcause actual results to differ materially from those in the statements.Important factors that might cause the

Company'sactual results to differ materially include, but are not limited to, thefollowing:

• Federaland state legislative and regulatory developments;

• Changesin management's estimate of the adequacy of the allowance for loanlosses(and/or other significant estimates such as OREO, deferred tax valuationallowance, etc.);

• Changesin the level and direction of loan delinquencies and write-offs;

• Interestrate movements and their impact on customer behavior and Upbancorp's netinterest margin;

• Theimpact of repricing and competitors' pricing initiatives on loan and depositproducts;

• Upbancorp'sability to adapt successfully to technological changes to meet customers' needsand developmentsin the market place;

• Upbancorp'sability to access cost effective funding;

• Economicconditions and

• Recentlyenacted financial modernization legislation.

 

 

**ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ON MARKET RISK**

 

Management, to augment static gap 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 change assuming animmediate and sustained parallel shift in rates of 50, 100 and 200 basispoints, both upward and downward. The model uses scheduled amortization, calldate or final maturity as appropriate on all non-rate sensitive assets. Themodel uses repricing frequency on all variable rate assets and liabilities, italso uses a 5-year decay analysis on all non-rate sensitive deposits.Prepayment rates on fixed rate loans have been adjusted up or down by 10% peryear to incorporate historical experience in both an up-rate and down-rateenvironment.

 

Utilizing this measurement concept, theinterest rate risk of the Company, expressed as change in net interest incomeas 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 September 30, 2001 |   | -1.28                   | % | -0.61 | % | -0.43 | % | -0.03 | % | -0.03 | % | -0.05 | % |
| At December 31, 2000  |   | -0.70                   | % | -0.28 | % | -0.23 | % | 0.13 | % | 0.11 | % | -0.26 | % |

 

Based upon these analyses, management hasdetermined that there has been no material change at September 30, 2001 ininterest rate risk for the Company, from the December 31, 2000 calculatedresults.

 

**PART2. - 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                                          |

 

 

**SIGNATURES**

 

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

 

 
| Date:  November 9, 2001 | UPBANCORP,  INC.        |
|-------------------------|-------------------------|
|                    | (The Registrant)        |
|                    |                    |
|                    |                    |
|                    | \s\Richard  K. Ostrom   |
|                    | Richard  K. Ostrom      |
|                    | Chairman  of the Board, |
|                    | President  and Chief    |
|                    | Executive  Officer      |