U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
COMMISSION FILE NUMBER 0-19829
UMBRELLA BANCORP, INC.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3620612
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.}
5818 South Archer Road, Summit, Illinois 60501-1830
(Address of principal executive offices)
(708) 458-4800
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
The Registrant had 1,688,213 shares outstanding as of November 12, 2001.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2001
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Item 1 Financial Statements
Consolidated Statements of Financial Condition
as of September 30, 2001 and December 31, 2000 (unaudited)............ 3
Consolidated Statements of Income (Loss) For the Three-and Nine-
Month Periods ended September 30, 2001 and 2000 (unaudited)........... 4
Consolidated Statements of Comprehensive Income For
The Three- and Nine-Months ended September 30, 2001 and 2000 (unaudited) 5
Consolidated Statements of Stockholders' Equity
for the Nine Months ended September 30, 2001 and 2000 (unaudited) .... 6
Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 2001 and 2000 (unaudited) ............ 7
Notes to Consolidated Financial Statements ........................... 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................. 12
Item 3 Quantitative and Qualitative Disclosures about Market Risk............ 18
PART II - OTHER INFORMATION
Item 1 Legal Proceedings .................................................... 20
Item 2 Changes in Securities ................................................ 20
Item 3 Default Upon Senior Securities ....................................... 20
Item 4 Submission of Matters to a Vote
of Security Holders .................................................. 20
Item 5 Other Information .................................................... 20
Item 6 Exhibits and Reports on Form 8-K ..................................... 20
Form 10-Q Signature Page ....................................................... 21
2
PART I - FINANCIAL INFORMATION
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(Dollars in Thousands)
September 30, December 31,
ASSETS 2001 2000
--------- ---------
Cash ................................................................ $ 12,361 $ 19,885
Interest-earning deposits .......................................... 74,496 74,132
--------- ---------
Total Cash & Cash Equivalents .................................... 86,857 94,017
Stock in Federal Home Loan Bank of Chicago .......................... 2,667 2,615
Trading account securities .......................................... 2,950 1,099
Securities available-for-sale ....................................... 141,109 14,574
Securities held-to-maturity ......................................... 4,729 26,523
Loans receivable, net ............................................... 292,853 279,420
Discounted loans receivable, net .................................... 3,795 7,103
Accrued interest receivable ......................................... 7,117 3,988
Foreclosed real estate, net ......................................... 1,353 2,498
Premises and equipment, net ......................................... 21,112 9,823
Mortgage loan servicing rights, net ................................. 337 397
Investment in limited partnership ................................... 3,743 4,387
Investment in GFS preferred stock ................................... -- 4,000
Debt issuance costs related to junior subordinated debt, net ........ 1,726 1,774
Prepaid expenses and other assets ................................... 13,928 10,875
--------- ---------
Total Assets .................................................. $ 584,276 $ 463,093
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits .......................................................... $ 479,344 $ 388,537
Borrowed money .................................................... 53,644 18,708
Advance payments by borrowers for taxes and insurance ............. 829 846
Accrued interest payable .......................................... 1,793 2,156
Custodial escrow balances for loans serviced ...................... 8,284 7,519
Other liabilities ................................................. 4,217 4,966
Junior subordinated debt .......................................... 16,587 16,587
Stockholders' Equity
Preferred stock ................................................... 3 3
Common stock ...................................................... 20 20
Additional paid-in-capital ........................................ 9,059 8,893
Retained earnings - substantially restricted ...................... 16,173 16,189
Treasury shares ................................................... (5,121) --
Employee Stock Ownership Plan loan ................................ (356) (405)
Accumulated other comprehensive income (loss) ..................... 45 (678)
Unearned stock awards ............................................. (245) (248)
--------- ---------
Total Stockholders' Equity .................................... 19,578 23,774
--------- ---------
Total Liabilities and Stockholders' Equity .................... $ 584,276 $ 463,093
========= =========
See notes to accompanying unaudited consolidated financial statements
3
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, except per share data)
For the Three Months Ended For the Nine Months Ended
09/30/01 09/30/00 09/30/01 09/30/00
-------- -------- -------- --------
(Unaudited)
Interest income
Loans receivable .................................... $ 6,136 $ 5,681 $ 18,356 $ 16,877
Discounted loans receivable ......................... 145 150 422 438
Securities available-for-sale ....................... 2,070 374 3,743 1,148
Securities held-to-maturity ......................... 189 466 1,036 1,402
Interest-earning deposits ........................... 1,325 638 4,738 1,727
-------- -------- -------- --------
Total interest income ......................... 9,865 7,309 28,295 21,592
-------- -------- -------- --------
Interest expense:
Deposits ............................................ 6,524 4,719 19,969 13,048
Borrowed money ...................................... 412 440 1,179 1,391
Junior subordinated debt ............................ 537 474 1,423 1,434
-------- -------- -------- --------
Total interest expense ........................... 7,473 5,633 22,571 15,873
-------- -------- -------- --------
Net interest income ............................ 2,392 1,676 5,724 5,719
-------- -------- -------- --------
Provision for loan losses .............................. 37 65 143 185
-------- -------- -------- --------
Net interest income after provision
for loan losses ................................... 2,355 1,611 5,581 5,534
-------- -------- -------- --------
Non-interest income:
Loan servicing income ............................... (1,023) 111 (810) 213
Mortgage banking .................................... -- 7 6 18
Gain (Loss) on sale of loans receivable, discounted
loans receivable, securities available for sale,
trading account securities and foreclosed real estate 1,288 115 2,386 427
Fees and service charges ............................ 113 385 1,063 976
Other .................................................. 258 20 566 113
-------- -------- -------- --------
Total non-interest income ..................... 636 638 3,211 1,747
Non-interest expense:
Compensation and benefits ........................... 1,042 938 2,645 2,564
Occupancy and equipment ............................. 707 632 2,082 1,503
Federal deposit insurance premium ................... 14 16 54 48
Other general and administrative fees ............... 1,903 814 4,359 2,230
-------- -------- -------- --------
Total non-interest expense .................... 3,666 2,400 9,140 6,345
-------- -------- -------- --------
Income (Loss) before income taxes ...................... (675) (151) (348) 936
Income tax expense/(benefit) ........................... (374) (240) (634) ( 34)
-------- -------- -------- --------
Net Income (Loss) ............................. $ ( 301) $ 89 $ 286 $ 970
-------- -------- -------- --------
Per Share Amounts:
Basic .............................................. $ (.18) $ .04 $ .16 $ .48
Diluted ............................................ (.16) .04 .15 .45
See notes to accompanying consolidated unaudited financial statements
4
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
For the Three Months Ended For the Nine Months Ended
09/30/01 09/30/00 09/30/01 09/30/00
-------- -------- -------- --------
(Unaudited)
Net Income (Loss).................................................... $ (301) $ 89 $ 286 970
Other comprehensive income/(loss):
Unrealized holding gains (losses) on securities
available-for-sale ........................................... 2,017 466 2,623 100
Less reclassification adjustment for gains
recognized in income ....................................... 1,146 -- 1,457 80
------- ------- ------- -------
Net unrealized gains/(losses) ................................ 871 466 1,166 20
Tax (expense)/benefit ........................................ (331) (177) (443) (8)
------- ------- ------- -------
Other comprehensive income/(loss) ................................... 540 289 723 12
------- ------- ------- -------
Comprehensive income ................................................ $ 239 $ 378 $ 1,009 $ 982
======= ======= ======= =======
See notes to accompanying consolidated unaudited financial statements
5
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
(Unaudited)
Accumulated
Additional Other
Preferred Common paid-in Retained Treasury Comprehensive
Stock Stock Capital earnings Stock ESOP Loan Income/(Loss)
----------------------------------------------------------------------------------
Nine months ended September 30, 2000
Balance at December 31, 1999 ......... $ 3 $ 20 $ 8,829 $ 12,260 -- $ (426) $ (850)
Net income ........................... -- -- -- 970 -- -- --
Other comprehensive loss, net of tax . -- -- -- -- -- -- 12
Amortization of purchase price
of MRP stock ......................... -- -- -- -- -- -- --
Stock options exercised .............. -- -- 15 -- -- -- --
Cash dividends ....................... -- -- -- (310) -- -- --
-------- -------- -------- -------- -------- -------- --------
Balance at September 30, 2000 ...... $ 3 $ 20 $ 8,844 $ 12,920 $ -- $ (426) $ (838)
======== ======== ======== ======== ======== ======== ========
Nine months ended September 30, 2001
Balance at December 31, 2000 ......... $ 3 $ 20 $ 8,893 $ 16,189 -- $ (405) $ (678)
Net income ........................... -- -- -- 286 -- -- --
Other comprehensive loss, net of tax . -- -- -- -- -- -- 723
Treasury Stock ....................... -- -- -- -- (5,121) -- --
ESOP Loan principal reduction ....... -- -- -- -- -- 49 --
Amortization of purchase price
of MRP stock ......................... -- -- -- -- -- -- --
Stock options exercised .............. -- -- 166 -- -- -- --
Cash dividends ....................... -- -- -- (302) -- -- --
-------- -------- -------- -------- -------- -------- --------
Balance at September 30, 2001 ........ $ 3 $ 20 $ 9,059 $ 16,173 $ (5,121) $ (356) $ 45
======== ======== ======== ======== ======== ======== ========
Total
Unearned Stockholders'
Stock Awards Equity
--------------------------
Nine months ended September 30, 2000
Balance at December 31, 1999 ......... $ (248) $ 19,588
Net income ........................... -- 970
Other comprehensive loss, net of tax . -- 12
Amortization of purchase price
of MRP stock ......................... 4 4
Stock options exercised .............. -- 15
Cash dividends ....................... -- (310)
-------- --------
Balance at September 30, 2000 ...... $ (244) $ 20,279
======== ========
Nine months ended September 30, 2001
Balance at December 31, 2000 ......... $ (248) $ 23,774
Net income ........................... -- 286
Other comprehensive loss, net of tax . -- 723
Treasury Stock ....................... -- (5,121)
ESOP Loan principal reduction ....... -- 49
Amortization of purchase price
of MRP stock ......................... 3 3
Stock options exercised .............. -- 166
Cash dividends ....................... -- (302)
-------- --------
Balance at September 30, 2001 ........ $ (245) $ 19,578
======== ========
See accompanying notes to unaudited consolidated financial statements.
6
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Nine Months Ended September 30,
2001 2000
---- ----
(Unaudited)
Cash flows from operating activities:
Net income ....................................................................... $ 286 $ 970
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation ................................................................... 982 473
Accretion of discounts and deferred loan fees .................................. (98) (198)
Provision for loan losses ...................................................... 143 185
(Gain) loss on sale of:
Securities available-for-sale .................................................. (1,457) (80)
Trading account securities ..................................................... (552) (146)
Loans receivable ............................................................... -- (101)
Branch location ................................................................ -- (117)
Foreclosed real estate ......................................................... 25 18
Net change in trading account activity ........................................... (1,299) 40
Loans originated and purchased for sale .......................................... (30,442) --
Proceeds from sale of loans receivable ........................................... 32,906 17,876
FHLB Stock dividend .............................................................. (52) (218)
(Increase) decrease in purchased mortgage servicing rights ....................... 704 (200)
Amortization of debt issuance costs .............................................. 48 --
Amortization of purchase price of MRP and ESOP stock ............................. 52 4
Decrease in accrued interest receivable, prepaid
expenses, and other assets ..................................................... (6,182) (9170)
Increase (decrease) in accrued interest payable and other liabilities ............ (1,555) 3,072
--------- ---------
Net cash (used in) provided by operating activities ............................ (6,491) 12,626
--------- ---------
Cash flows from investing activities:
Loans originated and purchased for portfolio ..................................... (512,959) (315,875)
Principal repayments on:
Loans receivable and discounted loans receivable ................................ 499,262 292,297
Securities-available-for sale ................................................... 81 --
Securities held to maturity ..................................................... -- 181
Proceeds from sale, maturity, or call of:
Foreclosed real estate ......................................................... 2,183 1,759
Securities held-to-maturity .................................................... 21,794 --
Securities available-for-sale .................................................. 23,409 843
Premises and equipment ......................................................... -- 500
Investment in GFS preferred stock .............................................. 4,000 --
Purchase of:
Securities available-for-sale .................................................. (147,402) (880)
FHLB stock ..................................................................... (218)
Premises and equipment ......................................................... (12,271) (1,423)
--------- ---------
Net cash used in investing activities ..................................... (121,903) (22,816)
--------- ---------
Cash flows from financing activities:
Net increase in deposits ....................................................... 90,807 47,053
Proceeds from borrowed funds ................................................... 38,208 2,690
Repayment of borrowed funds .................................................... (3,272) (15,884)
Purchase of treasury stock ..................................................... (5,121) --
Dividends paid ................................................................. (302) (310)
Proceeds from exercise of stock options ........................................ 166 15
Net increase (decrease) in advance payments by borrowers for taxes and insurance (17) 289
Net increase (decrease) in custodial escrow balances for loans serviced ........ 765 (296)
--------- ---------
Net cash provided by financing activities .................................... 121,234 33,557
--------- ---------
Net increase (decrease) in cash and cash equivalents ........................... (7,160) 23,367
Cash and cash equivalents at beginning of period ................................. 94,017 37,672
--------- ---------
Cash and cash equivalents at end of period ....................................... $ 86,857 $ 61,039
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense ................................................................. $ 22,934 $ 16,189
Income taxes ..................................................................... $ 1,100 $ 900
Non-cash investing activity - transfer of loans to foreclosed real estate ........... $ 1,063 $ 2,103
See accompanying notes to unaudited consolidated financial statements.
7
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments including normal recurring
accruals considered necessary for fair presentation have been included. The
results of operations for the three months and nine months ended September 30,
2001, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2001.
The September 30, 2001 unaudited consolidated financial statements include
Umbrella Bancorp, Inc. formerly, Argo Bancorp, Inc. ("Umbrella Bancorp" or the
"Company") and its wholly owned subsidiaries, UmbrellaBank, fsb, ("Savings Bank"
or "UmbrellaBank"), Argo Redemption Corp., Inc. ("Argo Redemption" or "ARC"),
and the Savings Bank's wholly owned subsidiary, Dolton-Riverdale Savings Service
Corporation (Dolton-Riverdale).
The Company, through its subsidiaries, provides a full range of financial
services through two retail banking facilities in Cook County, Illinois and an
Internet delivery.
8
NOTE B - EARNINGS PER SHARE
The following table sets forth the components of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
09/30/01 09/30/00 09/30/01 09/30/00
---------------------------------------
(Dollars and shares in thousands, except per share data)
Net Income (Loss) (Numerator) ................ $ (301) $ 89 $ 286 $ 970
======= ======= ======= =======
Basic earnings per share
weighted average common shares outstanding 1,687 2,009 1,813 2,007
Effect of dilutive stock options outstanding .. 142 138 142 138
------- ------- ------- -------
Total weighted average common shares and
equivalents outstanding for diluted computation 1,829 2,147 1,955 2,145
======= ======= ======= =======
Basic earnings (Loss) per shares .............. $ (.18) $ .04 $ .16 $ .48
Diluted earnings (Loss) per share ............. $ (.16) $ .04 $ .15 $ .45
9
NOTE C - REGULATORY CAPITAL REQUIREMENTS
Pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), savings institutions must meet three separate minimum capital
requirements. The following table summarizes, as of September 30, 2001, the
Company's and Bank's capital requirements under FIRREA and their actual capital
ratios. As of September 30, 2001, the Company and the Bank exceeded all current
minimum regulatory capital requirements.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provisions
September 30, 2001 Amount Ratio Amount Ratio Amount Ratio
============== ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Total Capital
(to Risk Weighted Assets)
Company $38,678 12.04% $25,707 8.00% $32,134 10.00%
Bank $31,861 10.46% $24,488 8.00% $30,610 10.00%
Tier I Capital
(to Risk Weighted Assets)
Company $36,120 11.24% $12,854 4.00% $19,281 6.00%
Bank $29,303 9.62% $12,244 4.00% $18,366 6.00%
Tier I Capital
(to Average Assets)
Company $36,120 6.18% $20,993 4.00% $26,241 5.00%
Bank $29,303 5.15% $20,343 4.00% $25,428 5.00%
Risk Weighted Assets (Company) $321,342
Adjusted Assets (Company) $584,231
Risk Weighted Assets (Bank) $304,525
Adjusted Assets (Bank) $568,676
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provisions
December 31, 2000 Amount Ratio Amount Ratio Amount Ratio
============== ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Total Capital
(to Risk Weighted Assets)
Company $43,503 17.35% $20,058 8.00% $25,073 10.00%
Bank $28,912 12.29% $18,617 8.00% $23,522 10.00%
Tier I Capital
(to Risk Weighted Assets)
Company $41,039 16.37% $10,029 4.00% $15,044 6.00%
Bank $26,448 11.24% $ 9,409 4.00% $14,113 6.00%
Tier I Capital
(to Adjusted Assets)
Company $41,039 8.85% $16,570 4.00% $20,713 5.00%
Bank $26,448 5.95% $17,783 4.00% $22,229 5.00%
Risk Weighted Assets (Company) $250,726
Adjusted Assets (Company) $463,771
Risk Weighted Assets (Bank) $235,220
Adjusted Assets (Bank) $444,504
10
NOTE D - COMMITMENTS AND CONTINGENCIES
At September 30, 2001 the Savings Bank had $22.4 million in commitments to table
fund loans precommitted for delivery to third parties. Commitments to fund loans
have credit risk essentially the same as that involved in extending loans to
customers and are subject to the Savings Bank's normal credit policies.
UmbrellaBank also had Community Reinvestment Act ("CRA") investment commitments
outstanding of $2.5 million.
11
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
In addition to historical information, this 10-Q may include certain forward
looking statements based on current management expectations. The Company's
actual results could differ materially from management expectations.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies, and expectations of the Company, are generally
identifiable by use of words such as "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors that could cause future results to vary from
current management expectations include, but are not limited to, general
economic conditions, legislative and regulatory changes, monetary and fiscal
policies of the federal government, changes in tax policies, rates and
regulations of federal, state and local tax authorities, changes in interest
rates, deposit flows, the cost of funds, demand for loan products, demand for
financial services, competition, changes in the quality or composition of the
Bank's loan and investment portfolios, changes in accounting principles,
policies or guidelines and other economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and prices. Further description of the risks and uncertainties to the
business are included in detail in Item 1, "Business" of the Company's 2000 Form
10-K.
OVERVIEW
Umbrella Bancorp, Inc. ("Umbrella Bancorp" or "Company") was incorporated in
Delaware in August 1987, for the purpose of acquiring UmbrellaBank, fsb,
("UmbrellaBank" or "Savings Bank"). The Company is a unitary savings and loan
holding company and is registered as such with the Office of Thrift Supervision
("OTS"), Federal Deposit Insurance Corporation ("FDIC") and the Securities and
Exchange Commission ("SEC"). On April 30, 2001 the Delaware Secretary of State
approved an Amendment to the Certificate of Incorporation of the Company
changing its name to Umbrella Bancorp, Inc. This Amendment to the Certificate of
Incorporation was approved by the shareholders of the Company at its Annual
Meeting of Shareholders held April 26, 2001.
The Company's business activities currently consist of ownership of the Savings
Bank, and investments in other equity securities. The Savings Bank's principal
business consists of attracting deposits from the public primarily through its
internet banking platform and to a lesser extent through its two remaining
traditional branch locations and investing these deposits, together with funds
generated from operations, primarily in commercial real estate and residential
real estate secured loans. Additionally, UmbrellaBank maintains a portfolio of
bank qualified securities, operates a network of more than 1650 ATM machines and
offers `purchase/repurchase' mortgage loan facilities (`warehouse lines') to a
number of mortgage banking firms. The Savings Bank's deposit accounts are
insured to the maximum allowable by the Federal Deposit Insurance Corporation
(the "FDIC").
The Savings Bank's results of operations are dependent primarily on net interest
income, which is the difference between the interest earned on its loans and
securities portfolios, and the interest paid on deposits and borrowed funds. The
Savings Bank's operating results are also affected by loan servicing
12
fees, customer service charges, fees from ATM operations, gains on the sale of
securities and other asset and other income. Operating expenses of the Savings
Bank include employee compensation and benefits, equipment and occupancy costs,
federal deposit insurance premiums and other administrative expenses.
The Savings Bank's results of operations are further affected by economic and
competitive conditions, particularly changes in market interest rates. Results
are also affected by monetary and fiscal policies of federal agencies, and
actions of regulatory authorities.
FINANCIAL CONDITION
Total assets increased by $121.2 million to $584.3 million at September 30,
2001, from $463.1 million at December 31, 2000. The growth in assets was the
result of a $90.8 million increase in deposits which were primarily invested in
available-for sale securities and loans receivable. Interest-earning assets at
September 30, 2001 include $33.3 million of ATM cash, on which the Savings Bank
earns a return of 200 basis points over the overnight FHLB rate.
Securities available-for-sale increased by $126.5 million during the nine months
ended September 30, 2001. Included in the increase were $39.0 million of trust
preferred securities, $13.7 million of tax-free municipals, and $41.9 million of
government agencies including $30.7 million of Federal National Mortgage
Association ("FNMA") Remics purchased through the Fixed Income Discount Advisory
Company, a division of Annaly Mortgage. Also included in the increase was $26.5
million invested in the U.S. Floating Rate Fund which is a public mutual fund
whose objective is to purchase floating rate mortgage-backed securities issued
by the United States Government, or its agencies.
Loans receivable and discounted loans receivable increased by $10.1 million to
$296.6 million at September 30, 2001 from $286.5 million at December 31, 2000.
Loan originations and purchases totaled $513.0 million partially offset by
principal repayments totaling $499.3 million, and transfers of loans to
foreclosed real estate of $1.1 million.
Premises and Equipment increased by $11.3 million to $21.1 million at September
30, 2001 from $9.8 million at December 31, 2001. This increase includes the
investment of $7.8 million in 862 ATMs and the purchase of an office building in
downtown Chicago for $4.3 million on which the Bank receives rental income.
Deposits increased $90.8 million to $499.3 million at September 30, 2001, from
$388.5 million at December 31, 2000. The increase can be attributed to the
success of the Internet delivery channel, www.umbrellabank.com, which had net
deposit inflows totaling $127.4 million for the nine months ended September 30,
2001.
Borrowings increased by $34.9 million to $53.6 million at September 30, 2001,
from $18.7 million at December 31, 2000. The increase was primarily due to the
$25.6 of repurchase agreements at an average cost of 3.44% utilized to finance
the $30.7 of FNMA Remics mentioned above. In addition, management chose to
finance the purchase of 365,796 of its shares from Deltec Banking Corporation
Limited ("Deltec") at $14.00 per share with a $5.0 million loan at market terms
from a third party lender. The Company had entered into a Stock Purchase
Agreement with Deltec on December 31, 1996
13
whereby Deltec acquired 25% of the issued and outstanding shares of the Company
at that date. In 2000, Deltec advised the Company that it no longer intended to
maintain its ownership position in accordance with the plan of liquidation and
dissolution of Deltec. The remaining increases in borrowed money of $9.3 million
were the result of overnight funds borrowed at September 30, 2001.
Stockholders' equity declined by $4.2 million to $19.6 million at September 30,
2001, from $23.8 million at December 31, 2000 primarily as a result of the
repurchase of 365,796 common shares for $5.1 million from Deltec. The Company
earned $286,000 in the nine months ended September 30, 2001 paid dividends of
$302,000, received $166,000 through the exercise of stock options and had other
comprehensive income of $723,000 through improved market valuations on its
securities available-for-sale portfolio.
LIQUIDITY
UmbrellaBank's primary sources of funds are deposits, proceeds from principal
and interest payments on the loan and securities available-for-sale portfolios
and held to maturity portfolios custodial deposit accounts related to loans
serviced for others, and the sale of discounted loans receivable and newly
originated fixed rate long-term mortgage loans. The most liquid assets are cash
and short-term investments. The levels of these assets are dependent on the
operating, financing and investing activities during any given period. Cash and
interest-earning deposits totaled $86.9 million at September 30, 2001.
UmbrellaBank is required to maintain minimum levels of liquid assets as defined
by OTS regulation. At September 30, 2001, the Savings Bank's liquid assets
represented 15.4% of its liquidity base as compared to the required level of
5.0%. The level of liquidity maintained is believed by management to be adequate
to meet the requirements of normal operations, potential deposit outflows, and
the current loan demand.
Liquidity management for UmbrellaBank is both a daily and long-term function of
the Savings Bank's senior management. Management meets on a daily basis and
monitors interest rates, current and projected commitments to purchase loans and
the likelihood of funding such commitments, and projected cash flows. Excess
funds are generally invested in short-term investments such as federal funds.
Cash flow projections are updated regularly to assure necessary liquidity.
INTEREST RATE RISK
The OTS regulatory capital requirements also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings institution's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities, and off-balance sheet contracts) that would result from a
hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2.0% must deduct
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2.0% multiplied by the estimated economic value of the
institution's interest rate risk component on a case-by-case basis. See Page 18
for quantitative and qualitative disclosures about market risk.
14
ASSET QUALITY
Umbrella Bancorp and UmbrellaBank regularly review assets to determine proper
valuation. Loans are reviewed on a regular basis and an allowance for possible
loan losses is established when, in the opinion of management, the net
realizable value of the property collateralizing the loan is less than the
outstanding principal and interest and the collectibility of the loan's
principal and interest becomes doubtful.
At September 30, 2001, UmbrellaBank had thirty-four (34) properties, totaling
$1.4 million classified as foreclosed real estate, as compared to forty-one (41)
properties totaling $2.5 million at December 31, 2000. The underlying properties
on September 30, 2001, consisted primarily of single family residences. The
foreclosed real estate has been written down to estimated fair value at
September 30, 2001. The total amount of loans receivable ninety (90) days or
more past due at September 30, 2001, was $4.5 million or 1.49% of total loans
receivable compared to $4.4 million or 1.57% of total loans on December 31,
2000. Loans ninety (90) days or more past due are primarily secured by
one-to-four family residences. Total non-performing assets at September 30,
2001, totaled $10.9 million or 1.91% of total assets compared to $6.9 million or
1.50% of total assets at December 31, 2000. Excluded from these totals are
$900,000 of discounted loans ninety (90) days or more contractually past due at
September 30, 2001, and $1.0 million at December 31, 2000. Growth in
non-performing assets was driven by management's decision to classify $6.7
million of single family loans underlying contractual remittance agreements not
performing in accordance with required schedules. At the same time, management
is confident that a significant portion of the increase, estimated at $3.0
million, may be resolved during the 4th quarter. At this time, management
believes that additions to the Allowance for Loan and Lease Losses will not be
required in order to fully resolve increases noted in the period.
RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2001, AND 2000.
GENERAL
The Company recorded a net loss of $301,000 or ($.16) per diluted share for
the three months ended September 30, 2001 compared to net income of $89,000 or
$.04 per diluted share for the same period last year. The loss was primarily the
result of a $1.1 million valuation reserve established on subordinated debt held
by the Company on Purchased Mortgage Servicing Rights ("PMSR's"). The value of
PMSR's have declined as a result of lower interest rates and the increased
volume of mortgage refinancing. The Company also recorded net gains of $1.3
million on the sale of available-for-sale and trading account securities for the
three months ended September 30, 2001 compared to net gains of $115,000 for the
same period last year. In addition, net interest income after provision for loan
losses increased by $744,000 to $2.4 million from $1.6 million for the same
period last year. Operating expenses, however, increased by $1.3 million. For
the nine months ended September 30, 2001 net income declined to $286,000 or $.16
per diluted share compared to $.45 per diluted share for the same period last
year. The average outstanding shares declined by 318,000 shares to 1,829,000
shares for the three months ended September 30, 2001 as compared to 2,147,000
shares for the same period last year. For the nine months average outstanding
shares declined by 190,000 shares to 1,955,000 shares compared to 2,145,000
outstanding for the same period last year.
15
INTEREST INCOME
Interest income for the three months ended September 30, 2001, totaled $9.9
million, as compared to $7.3 million for the comparable 2000 period. The $2.6
million increase was primarily the result of a $180.6 million increase in
average interest-earning assets, which was partially offset by a 91 basis point
decrease in the yield on earning assets to 7.16% from 8.07%. Earning asset
yields have declined as a result of re-pricing prime rate based loans with each
change in the prime lending rate. For the nine months ended September 30, 2001,
interest income increased by $6.7 million to $28.3 million from $21.6 million
for the same period last year. Average interest earning assets increased by
$128.4 million for the nine months ended September 30, 2001 compared to the same
period a year ago, however the yield on earning assets declined by 15 basis
points to 7.96% from 8.11%.
INTEREST EXPENSE
Interest expense for the three months ended September 30, 2001, totaled $7.5
million as compared to $5.6 million for the comparable 2000 period. The $1.9
million increase was primarily the result of a $194.1 million increase in
average interest bearing liabilities which more than offset a 32 basis point
decline in the weighted average cost of interest-bearing liabilities to 5.59%
for the three-months ended September 30, 2001 as compared to 5.91% for the same
period last year. Interest-bearing liabilities include $16.7 million of 11.0%
junior subordinated debt which the Company issued in November, 1998. For the
nine month period ended September 30, 2001 interest expense increased by $6.7
million to $22.6 million compared to $15.9 million for the same period last
year. The increase for the nine month period was the result of a $169.1 million
increase in average interest bearing liabilities and a 24 basis point increase
in the cost of interest bearing liabilities to 6.05% as compared to 5.81% for
the same period last year.
NET INTEREST INCOME
Net interest income increased by $716,000 for the three months ended September
30, 2001 when compared to the same period a year ago. Higher average balances
offset a 51 basis point decline in the net interest spread to 1.57% for the
three months ended September 30, 2001 as compared to 2.08% for the same period
last year. For the nine months ended September 30, 2001 net interest income
remained stable at $5.7 million. Higher average balances offset a 38 basis point
decline in the net interest spread to 1.91% from 2.29% for the comparable 2000
period.
PROVISION FOR LOAN LOSSES
Provision for loan losses totaling $143,000 were recorded for the nine months
ended September 30, 2001, as compared to $185,000 for the same period in 2000.
Allowance for Loan and Lease Losses totaled $2.6 million or .86% of net loans
outstanding at September 30, 2001 compared to $2.4 million or .87% of net loans
outstanding at December 31, 2000. Management believes that Allowance for Loan
and Lease Losses are adequate, and will continue to monitor the loan portfolio
and substandard assets for loss exposure.
16
NON-INTEREST INCOME
Total non-interest income remained stable at $636,000 for the three months ended
September 30, 2001, as compared to $638,000 for the three months ended September
30, 2000. The valuation reserve of $1.1 million on the Company's limited
partnership interest in PMSRs, which is reflected in Loan Servicing Income
offset net gains on the sale of securities available-for-sale and trading
account securities totaling $1.3 million as compared to $115,000 for the year
ago period. For the nine months, gains on the sale of available-for-sale and
trading securities totaled $2.1 million compared to $243,000 for the same period
last year. Also included in gains on sale for the nine months was additional
profit recorded on the December 2000 sale of three branch banking centers of
$232,000 and profit previously deferred totaling $84,000 on the 1999 sale of the
Savings Bank's operating properties. Included in other non-interest income were
rents totaling $132,000 and $265,000 for the three and nine months ended
September 30, 2001, respectively received on a downtown Chicago office building
purchased in April 2001 for $4.3 million.
NON-INTEREST EXPENSE
Non-interest expense increased by $1.3 million to $3.7 million or 2.79% of
average assets for the three months ended September 30, 2001 from $2.4 million
or 2.07% of average assets for the same period last year. For the nine months
ended September 30, 2001, non-interest expense increased by $2.8 million to $9.1
million or 2.32% of average assets from $6.3 million or 2.06% of average assets
for the same period last year. The increase in operating expenses was primarily
the result of variable expenses related to the Savings Bank's Internet delivery
channel, www.umbrellabank.com, which incurred operating expenses totaling $1.2
million and $3.8 million for the three and nine months ended September 30, 2001,
respectively. The Savings Bank incurs variable expenses for its Internet
customers related to data processing and call center services expense utilized
in the set-up and servicing of new accounts. Deposits gathered on the Internet
increased by $127.4 million to $276.7 million at September 30, 2001 from $149.3
million at December 31, 2000. Additional increase in operating expenses not
related to the Internet delivery channel were in part the result of a $208,000
increase in professional fees and a $110,000 increase in expenses related to the
Savings Bank's ATM deployment activities.
INCOME TAX EXPENSE
The Company recorded a tax benefit of $634,000 for the nine months ended
September 30, 2001 compared to a tax benefit of $34,000 for the same period last
year. The year 2001 benefit is based on a 38.0% tax rate calculated on the
pre-tax loss of $348,000 minus the utilization of affordable housing tax credits
totaling $502,000 for the nine months ended September 30, 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001 the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 102, "Selected Loan Loss Allowance Methodology and Documentation
Issues" ("SAB 102"). Due to the recent issuance of this SAB, management is not
able to comment in the September 30, 2001 Form 10-Q regarding the effect of this
SAB.
In July 2001, the Financial Accounting Standards Board approved two standards,
Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS
No. 141) and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142).
The Company does not expect the adoption of these standards to have a material
effect on its consolidated statements.
17
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of its normal operations, the Savings Bank is subject to interest-rate
risk on the interest-sensitive assets it invests in and the interest-sensitive
liabilities it borrows. Interest rate risk results when the maturity or
repricing intervals and interest rate indices of the interest-earning assets,
interest-bearing liabilities, and off-balance sheet financial instruments are
different, creating a risk that changes in the level of market interest rates
will result in disproportionate changes in the value of, and the net earnings
generated from, the Company's interest-earning assets, interest-bearing
liabilities, and off-balance sheet financial instruments. The Company's exposure
to interest rate risk is managed primarily through the Company's strategy of
selecting the types and terms of interest-earning assets and interest-bearing
liabilities which generate favorable earnings, while limiting the potential
negative effects of changes in market interest rates. Since the Company's
primary source of interest-bearing liabilities is customer deposits, the
Company's ability to manage the types and terms of such deposits may be somewhat
limited by customer preferences in the market areas in which the Company
operates. Borrowings, which include FHLB advances, short-term borrowings, and
long-term borrowings, are generally structured with specific terms which in
management's judgment, when aggregated with the terms for outstanding deposits
and matched with interest-earning assets, mitigate the Company's exposure to
interest rate risk. The rates, terms and interest rate indices of the Company's
interest-earning assets result primarily from the Company's strategy of
investing in loans and securities (a substantial portion of which have
adjustable-rate terms) which permit the Company to limit its exposure to
interest rate risk, together with credit risk, while at the same time achieving
a positive interest rate spread from the difference between the income earned on
interest-earning assets and the cost of interest-bearing liabilities. The
overall goal is to manage this interest rate risk to most efficiently utilize
the Savings Bank's capital, as well as to maintain an acceptable level of change
to its net portfolio value ("NPV"), and net interest income. The Savings Bank's
strategy is to minimize the impact of sudden and sustained changes in interest
rates on NPV and its net interest margin.
Interest rate risk exposure is measured using interest rate sensitivity analysis
to determine the Savings Bank change in NPV in the event of hypothetical changes
in interest rates, as well as interest rate sensitivity gap analysis, which
monitors the repricing characteristics of the Savings Bank's interest-earning
assets and interest-bearing liabilities. The Board of Directors has established
limits to changes in NPV and net interest income across a range of hypothetical
interest rate changes. If estimated changes to NPV and net interest income are
not within these limits, the Board may direct management to adjust its
asset/liability mix to bring its interest rate risk within Board limits.
Interest rate sensitivity analysis is used to measure the Savings Bank's
interest rate risk by calculating the estimated change in the NPV of its cash
flows from interest sensitive assets and liabilities, as well as certain
off-balance sheet items, in the event of a series of sudden and sustained
changes in interest rates ranging from 100 to 500 basis points. Management
assumes that a 200 basis point movement up or down is considered reasonable and
plausible for purposes of managing its interest-rate risk on a day-to-day basis.
NPV is the market value of portfolio equity and is computed as the difference
between the market value of assets and the market value of liabilities, adjusted
for the value of off-balance sheet items. There has been no material change in
market risk since December 31, 2000.
18
The following table presents the Savings Bank's projected change in NPV for the
various rate shocks as of June 30, 2001 and 2000. The June 30, 2001 information
is the most recent available.
Estimated Increase
Change in Estimated (Decrease) in NPV
-----------------
Interest Rate NPV Amount Percent
------------- --- ------ -------
(Dollars in thousands)
2001:
300 basis point rise $22,816 $ (4,577) (17)%
200 basis point rise 24,281 (3,112) (11)
100 basis point rise 25,925 (1,468) (5)
Base scenario 27,393 - -
100 basis point decline 28,198 805 3
200 basis point decline 28,409 1,016 4
300 basis point decline 28,322 929 3
Estimated Increase
Change in Estimated (Decrease) in NPV
-----------------
Interest Rate NPV Amount Percent
------------- --- ------ -------
(Dollars in thousands)
2000:
300 basis point rise $22,390 $ (8,402) (27)%
200 basis point rise 25,593 (5,199) (17)
100 basis point rise 28,422 (2,370) (8)
Base scenario 30,792 - -
100 basis point decline 32,695 1,903 6
200 basis point decline 34,135 3,343 11
300 basis point decline 35,819 5,027 16
The NPV is calculated by UmbrellaBank using guidelines established by the OTS
related to interest rates, loan prepayment rates, deposit decay rates and market
values of certain assets under the various interest rate scenarios. These
assumptions should not be relied upon as indicative of actual results due to the
inherent shortcomings of the NPV analysis. These shortcomings include (i) the
possibility that actual market conditions could vary from the assumptions used
in the computation of NPV, (ii) certain assets, including adjustable-rate loans,
have features which affect the potential repricing of such instruments, which
may vary from the assumptions used, and (iii) the likelihood that as interest
rates are changing, the Investment Committee would likely be changing strategies
to limit the indicated changes in NPV as part of its management process.
19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Umbrella Bancorp and UmbrellaBank are not engaged in any legal proceedings of a
material nature at the present time.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
The following exhibits are incorporated herein by reference:
(3) The Certificate of Incorporation and By-Laws.
3.1 Amended Certificate of Incorporation of Umbrella Bancorp
Inc.*
3.2 By-Laws of Umbrella Bancorp, Inc.*
4.0 Stock Certificate of Umbrella Bancorp, Inc.*
11.0 Statement regarding Computation of Earnings Per Share
(See Note D)
B. Reports of Form 8-K
None
- --------------------------------------------------------------------------------
* Incorporated herein by reference into this document from the
Exhibits to Form S-1, Registration Statement, and filed on January
28, 1992, any amendments thereto, Registration No. 33-45222.
20
SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UMBRELLA BANCORP, INC.
Date: November 12, 2001 /S/ John G. Yedinak
----------------- ------------------------------------------------
John G. Yedinak, Chairman of the Board,
President, Chief Executive Officer, and Director
/S/ Dominic M. Fejer
------------------------------------------------
Dominic M. Fejer, Principal Accounting and
Financial Officer
21