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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 MARCH 31, 2002
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
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The Registrant had 1,724,038 shares outstanding as of May 13, 2002.
Transitional Small Business Disclosure Format (check one): Yes No X
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UMBRELLA BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 2002
INDEX
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PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Item 1 Financial Statements
Consolidated Statements of Financial Condition
as of March 31, 2002 and December 31, 2001 (unaudited).... 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 2002 and 2001 (unaudited)................. 4
Consolidated Statements of Comprehensive Income for the
Three Months Ended March 31, 2002 and 2001 (unaudited).... 5
Consolidated Statements of Stockholders' Equity for the
Three Months Ended March 31, 2002 and 2001 (unaudited) ... 6
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2002 and 2001 (unaudited) ... 7
Notes to Consolidated Financial Statements ............... 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations ............11
Item 3 Quantitative and Qualitative Disclosures about
Market Risk...............................................16
PART II - OTHER INFORMATION
- ---------------------------
Item 1 Legal Proceedings ........................................18
Item 2 Changes in Securities ....................................18
Item 3 Default Upon Senior Securities ...........................18
Item 4 Submission of Matters to a Vote of Security Holders ......18
Item 5 Other Information ........................................18
Item 6 Exhibits and Reports on Form 8-K .........................18
Form 10-Q Signature Page ...........................................19
2
PART I - FINANCIAL INFORMATION
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(Dollars in Thousands)
March 31, December 31,
ASSETS 2002 2001
---- ----
Cash .................................................... $ 2,483 $ 647
Interest-earning deposits ............................... 75,959 37,002
--------- ---------
Total Cash & Cash Equivalents ........................ 78,442 37,649
Trading account securities .............................. 5,751 6,053
Securities available-for-sale ........................... 97,230 123,118
Securities held-to-maturity ............................. 882 1,859
Loans held for sale ..................................... 38,970 65,056
Loans receivable, net ................................... 246,876 250,353
Mortgage loan servicing rights, net ..................... 337 337
Investment in limited partnership ....................... 3,723 3,743
Stock in Federal Home Loan Bank of Chicago .............. 2,840 2,800
Foreclosed real estate, net ............................. 1,105 730
Premises and equipment, net ............................. 19,979 20,609
Debt issuance costs, net ................................ 1,817 1,831
Accrued interest receivable ............................. 4,751 5,272
Receivable from loan servicers........................... 4,081 4,479
Prepaid expenses and other assets ....................... 14,419 12,746
--------- ---------
Total Assets ...................................... $ 521,203 $ 536,635
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits .............................................. $ 444,592 $ 458,147
Borrowed money ........................................ 26,059 28,343
Custodial escrow balances for loans serviced for others 8,920 9,499
Accrued interest payable .............................. 2,245 1,707
Other liabilities ..................................... 5,259 4,759
Junior subordinated debt .............................. 17,055 16,603
Stockholders' Equity
Preferred stock ....................................... 3 3
Common stock .......................................... 21 21
Additional paid-in-capital ............................ 9,254 9,214
Retained earnings - substantially restricted .......... 14,516 15,181
Treasury stock - common, at cost ...................... (5,121) (5,121)
Employee Stock Ownership Plan loan .................... (324) (341)
Unearned stock awards ................................. (248) (248)
Accumulated other comprehensive loss .................. (1,028) (1,132)
--------- ---------
Total Stockholders' Equity ...................... 17,073 17,577
--------- ---------
Total Liabilities and Stockholders' Equity ........ $ 521,203 $ 536,635
========= =========
See notes to accompanying unaudited consolidated financial statements.
3
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, except per share data)
For the Three Months
Ended March 31,
2002 2001
---- ----
(Unaudited)
Interest income
Loans receivable .................................................... $ 5,077 $ 6,042
Securities available-for-sale ....................................... 1,163 591
Securities held-to-maturity ......................................... 42 385
Interest-earning deposits ........................................... 1,603 1,738
------- -------
Total interest income ......................................... 7,885 8,756
------- -------
Interest expense:
Deposits ............................................................ 4,919 6,528
Borrowed money ...................................................... 566 341
Junior subordinated debt ............................................ 482 443
------- -------
Total interest expense ........................................... 5,967 7,312
------- -------
Net interest income ............................................ 1,918 1,444
------- -------
Provision for loan losses .............................................. 35 75
------- -------
Net interest income after provision
for loan losses ................................................... 1,883 1,369
------- -------
Non-interest income:
Loan servicing income ............................................... 73 89
Mortgage banking .................................................... -- 5
(Loss) gain on sale of loans receivable,
securities available for sale, trading account securities
and foreclosed real estate ........................................ (441) 641
Fees and service charges ............................................ 206 638
Other .................................................................. 16 32
------- -------
Total non-interest (loss) income .............................. (146) 1,405
Non-interest expense:
Compensation and benefits ........................................... 928 843
Occupancy and equipment ............................................. 498 622
Federal deposit insurance premiums .................................. 22 20
Other general and administrative fees ............................... 1,799 1,101
------- -------
Total non-interest expense .................................... 3,247 2,586
------- -------
(Loss) income before income taxes ...................................... (1,510) 188
Income tax (benefit) ................................................... (949) (192)
------- -------
Net (loss) income ............................................. $ (561) $ 380
======= =======
Per Share Amounts:
Basic............................................................... $ (.33) $ .19
Diluted ............................................................ $ (.33) $ 17
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 March 31,
2002 2001
---- ----
(Unaudited)
Net (loss) income ...................................................... $ (561) $ 380
Other comprehensive income/(loss):
Unrealized holding (losses) on securities available-for-sale .... (747) (11)
Less reclassification adjustment for losses recognized in income (914) --
------- -------
Net unrealized gains/(losses) ................................... 167 (11)
Tax expense/(benefit) ........................................... 63 (4)
------- -------
Other comprehensive income/(loss) ...................................... 104 (7)
------- -------
Comprehensive (loss) income ............................................ $ (457) $ 373
======= =======
See notes to accompanying consolidated unaudited financial statements.
5
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
(Unaudited)
Accumulated Total
Additional Unearned Other Stock-
Preferred Common Paid-in Retained Treasury ESOP Stock Comprehensive holders'
Stock Stock Capital Earnings Stock Loan Awards Income/(Loss) Equity
----------------------------------------------------------------------------------------------
Three months ended March 31, 2001
- ----------------------------------
Balance at December 31, 2000 .............. $ 3 $ 20 $ 8,893 $ 16,189 $ -- $ (405) $ (248) $ (678) $ 23,774
Net income ................................ -- -- -- 380 -- -- -- -- 380
Other comprehensive loss, net of tax ...... -- -- -- -- -- -- -- (7) (7)
ESOP loan principal reduction ............. -- -- -- -- -- 14 -- -- 14
Amortization of purchase price of MRP stock -- -- -- -- -- -- 5 -- 5
Cash dividends ............................ -- -- -- (100) -- -- -- -- (100)
------ ----- -------- -------- -------- -------- ------ -------- --------
Balance at March 31, 2001 ................. $ 3 $ 20 $ 8,893 $ 16,469 $ -- $ (391) $ (243) $ (685) $ 24,066
====== ===== ======== ======== ======== ======== ====== ======== ========
Three months ended March 31, 2002
- ---------------------------------
Balance at December 31, 2001 .............. $ 3 $ 21 $ 9,214 $ 15,181 $ (5,121) $ (341) $ (248) $ (1,132) $ 17,577
Net loss .................................. -- -- -- (561) -- -- -- -- (561)
Other comprehensive income, net of tax .... -- -- -- -- -- -- -- 104 104
ESOP loan principal reduction ............. -- -- -- -- -- 17 -- -- 17
Stock options exercised ................... -- -- 40 -- -- -- -- -- 40
Cash dividends ............................ -- -- -- (104) -- -- -- -- (104)
------ ----- -------- -------- -------- -------- ------ -------- --------
Balance at March 31, 2002 ................. $ 3 $ 21 $ 9,254 $ 14,516 $ (5,121) $ (324) $ (248) $ (1,028) $ 17,073
====== ===== ======== ======== ======== ======== ====== ======== ========
See accompanying notes to unaudited consolidated financial statements.
6
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Three Months Ended
March 31,
2002 2001
---- ----
(Unaudited)
Cash flows from operating activities:
Net (loss) income ......................................................................... $ (561) $ 380
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization ........................................................... 860 628
Accretion of discounts and deferred loan fees ........................................... 41 (68)
Provision for loan losses ............................................................... 35 75
(Gain) loss on sale of:
Securities available-for-sale ........................................................... 914 (61)
Trading account securities .............................................................. (508) (287)
Loans receivable ........................................................................ 39 --
Branch facilities ....................................................................... (28) (265)
Foreclosed real estate .................................................................. 24 (28)
Net change in trading account activity .................................................... 810 198
Loans originated and purchased for sale ................................................... (156,929) (29,568)
Proceeds from sale of loans held for sale.................................................. 182,976 32,906
FHLB Stock dividend ....................................................................... (40) --
Decrease (increase) in purchased mortgage servicing rights ................................ 20 (89)
Net change in debt issuance costs ......................................................... 14 --
Amortization of purchase price of MRP and ESOP stock ...................................... 17 5
Increase in accrued interest receivable, prepaid expenses and other assets ................ (1,215) (6,009)
Increase (decrease) in accrued interest payable and other liabilities ..................... 1,066 (74)
--------- ---------
Net cash provided by (used in) operating activities ................................ 27,535 (2,257)
--------- ---------
Cash flows from investing activities:
Loans originated and purchased for portfolio .............................................. (19,039) (105,603)
Principal repayments on:
Loans receivable ......................................................................... 22,284 106,094
Securities-available-for sale ............................................................ 3,798 29
Securities held to maturity .............................................................. 292 --
Proceeds from sale, maturity, or call of:
Foreclosed real estate .................................................................. 155 932
Securities held-to-maturity ............................................................. 685 9,294
Securities available-for-sale ........................................................... 40,957 764
Investment in GFS preferred stock ....................................................... -- 3,900
Purchase of:
Securities available-for-sale ........................................................... (19,614) (24,422)
Premises and equipment .................................................................. (230) (751)
--------- ---------
Net cash provided by (used in) investing activities ................................ 29,288 (9,763)
--------- ---------
Cash flows from financing activities:
Net (decrease) increase in deposits ..................................................... (13,555) 68,296
Proceeds from borrowed funds ............................................................ 98,464 720
Repayment of borrowed funds ............................................................. 100,748 (3,200)
Reissuance of junior subordinated debentures ............................................ 1,065 --
Repurchase of junior subordinated debentures ............................................ (613) --
Dividends paid .......................................................................... (104) (100)
Proceeds from exercise of stock options ................................................. 40 --
Net (decrease) increase in custodial escrow balances for loans serviced ................. (579) 554
--------- ---------
Net cash (used in) provided by financing activities ................................ (16,030) 66,270
--------- ---------
Net increase in cash and cash equivalents ............................................... 40,793 54,250
Cash and cash equivalents at beginning of period ............................................. 37,649 94,017
--------- ---------
Cash and cash equivalents at end of period ................................................... $ 78,442 $ 148,267
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense .......................................................................... $ 5,429 $ 7,290
Income taxes .............................................................................. $ -- $ 1,500
Non-cash investing activity - transfer of loans to foreclosed real estate ................. $ 554 $ 497
Non-cash investing activity - ending receivable from loan servicers........................ $ 4,081 $ 4,437
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 accounting principles generally accepted in the United States
of America ("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 GAAP 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 ended March 31, 2002, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002.
Certain reclassifications have been made to prior period amounts in the
financial statements in order to conform to the current period presentation.
The unaudited consolidated financial statements include Umbrella 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 its Internet banking delivery channel at
http://www.umbrellabank.com and two retail banking facilities in Cook County,
Illinois.
NOTE B - EARNINGS (LOSS) PER SHARE
The following table sets forth the components of basic and diluted earnings
(loss) per share. Basic and diluted loss per share is the same for 2002 as
diluted loss per share would be anti-dilutive.
Three Months Ended
March 31,
2002 2001
-------------------
(Dollars and shares in thousands,
except per share data)
Net (loss) income ............................ $ (561) $ 380
======= =======
Basic earnings per share
weighted average common shares outstanding 1,709 2,023
Effect of dilutive stock options outstanding .. -- 157
------- -------
Total weighted average common shares and
equivalents outstanding for diluted computation 1,709 2,180
======= =======
Basic (loss) earnings per share ............... $ (.33) $ .19
Diluted (loss) earnings per share ............. $ (.33) $ .17
8
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 tables summarize, as of March 31, 2002 and December
31, 2001, the Company's and Savings Bank's actual capital amounts and ratios.
Management believes as of March 31, 2002 and December 31, 2001, the Bank
exceeded all current minimum regulatory capital requirements.
As of December 31, 2001, the most recent notification from the Office of Thrift
Supervision ("OTS") categorized the Savings Bank as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the Savings Bank must maintain total risk-based, Tier I
risk-based, Tier I leverage, and tangible capital ratios as set forth in the
following table. There are no conditions or events since that notification that
management believes have changed the institution's category. However, the
Savings Bank is restricted from increasing assets during any quarter in excess
of an amount equal to net interest credited on deposit liabilities during the
quarter without prior written approval of the OTS and was required to divest of
$27 million of Trust Preferred Securities ("TPS"), which was accomplished by
March 21, 2002. The sale of these securities resulted in a pre-tax loss of
$770,000.
On November 28, 2001, the Savings Bank issued and sold $3.0 million subordinated
debentures in a pooled security offering. On December 5, 2001 UmbrellaBank filed
an application with the OTS seeking inclusion of the proceeds of the sale of the
debentures in regulatory "Tier II" (risk weighted) capital. Such application is
pending as of May 13, 2002. Thus the Savings Bank's ratios below do not reflect
the $3.0 million of subordinated debentures.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provisions
March 31, 2002 Amount Ratio Amount Ratio Amount Ratio
============== ------ ------ ------ ----- ------ -----
(Dollars in Thousands)
Total Capital
(to Risk Weighted Assets)
Company $38,113 12.41%
Savings Bank $32,476 11.08% $23,497 8.00% $29,372 10.00%
Tier I Capital
(to Risk Weighted Assets)
Company $35,157 11.45%
Savings Bank $30,020 10.24% $11,749 4.00% $17,623 6.00%
Tier I Capital
(to Adjusted Assets)
Company $35,157 6.72%
Savings Bank $30,020 5.91% $20,306 4.00% $25,382 5.00%
December 31, 2001
=================
Total Capital
(to Risk Weighted Assets)
Company $38,296 11.94%
Savings Bank $32,745 10.77% $24,329 8.00% $30,411 10.00%
Tier I Capital
(to Risk Weighted Assets)
Company $35,312 11.01%
Savings Bank $30,261 9.95% $12,164 4.00% $18,247 6.00%
Tier I Capital
(to Adjusted Assets)
Company $35,312 6.58%
Savings Bank $30,261 5.82% $20,785 4.00% $25,981 5.00%
9
NOTE D - COMMITMENTS AND CONTINGENCIES
At March 31, 2002 the Savings Bank had commitments relating to loans, lines of
credit and letters of credit totaling $33.6 million. Commitments to fund loans,
lines of credit and letters of credit 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. The Savings Bank also had Community Reinvestment
Act ("CRA") investment commitments outstanding of $1.2 million.
10
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. 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 the words "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 which could have a material adverse affect on the
operations and future prospects of the Company and its subsidiary include, but
are not limited to changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Treasury and the Federal Reserve Board, the quality or composition of the loan
and securities portfolios, demand for loan products, deposit flows, competition,
demand for financial services in the Company's market area, the Company's
implementation of new technologies, the Company's ability to develop and
maintain secure and reliable information systems and accounting principles,
policies and guidelines. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements. Further information concerning the Company and its business
including additional factors that could materially affect the Company's
financial results is included in the Company's filings with the Securities and
Exchange Commission. Further description of the risks and uncertainties to the
business are included in detail in Item 1, "Business" of the Company's 2001 Form
10-K.
OVERVIEW
Umbrella Bancorp, Inc. ("Umbrella Bancorp" or the "Company") is a unitary
savings and loan holding company and is registered as such with the Office of
Thrift Supervision ("OTS"). The Company is an active holding company with assets
consisting of investments in UmbrellaBank, fsb ("UmbrellaBank" or the "Savings
Bank"), marketable securities, loans receivable, and interest-earning deposits.
The Company is a Federal Housing Authority ("FHA") approved originator and
servicer and an approved Federal National Mortgage Association ("Fannie Mae")
servicer.
The Savings Bank's principal business consists of attracting deposits from the
public through its Internet banking delivery channel at
http://www.umbrellabank.com and its two traditional branch locations and
investing these deposits primarily in residential and commercial real estate
secured loans. Additionally, UmbrellaBank maintains a portfolio of bank
qualified securities, operates a network of more than 1,900 ATM machines and
offers "purchase/repurchase" mortgage loan facilities ("purchase/repurchase loan
program") 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 fees,
customer service charges and fees, fees from ATM operations, gains on the sale
of securities and other assets 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.
11
REGULATORY COMPLIANCE
As a result of the review of the Savings Bank's operations by the OTS as of and
for the nine month period ended September 30, 2001, violations of regulations as
discussed herein, including violation of investment limitations for Trust
Preferred Securities ("TPS"), the failure to perform pre-acquisition analysis
designed to measure sensitivity to interest rate shocks on CMO securities,
violations of the loan to one borrower limitation with respect to both loans and
investment securities, violation of FRA Sections 23A and 23B with respect to
transactions between the Company and UmbrellaBank, as well as the possibility of
future loan losses attributable to fraud discovered in certain
purchase/repurchase credit facilities, were the subject of extensive criticism
by the OTS. The Company and the Savings Bank have been required to take action
to correct past violations, ameliorate violations existing as of December 31,
2001 and ensure future violations do not occur. The Company and the Savings Bank
are currently subject to supervisory imposed limitations, including restrictions
on growth and lending activities, and are required to provide reports to the OTS
detailing corrective actions taken and on-going assurances of monitoring and
compliance in areas of criticism.
As of March 31, 2002, the Company has corrected all violations noted above,
except for the loan to one borrower violation, which will be corrected before
the end of fiscal year 2002. The Company and Savings Bank have also implemented
changes to operating policies, strengthened existing procedures and adopted more
effective administrative controls which management believes will prevent further
violations in the future. Management believes the violation of the loan to one
borrower limitation will be corrected in 2002. Formal enforcement action has not
been undertaken by the OTS against the Company or Savings Bank, but remains a
possibility.
FINANCIAL CONDITION
Total assets decreased by $15.4 million to $521.2 million at March 31, 2002,
from $536.6 million at December 31, 2001. The decrease in assets was primarily
the result of a $13.6 million decrease in deposits, as a result of the Savings
Bank's effort not to renew maturing public and brokered certificates of deposit
yielding higher interest rates. In addition, interest-earning deposits increased
$39.0 million during the three months ended March 31, 2002 to $76.0 million as
the Savings Bank invested the proceeds from the sale of securities
available-for-sale and loans held for sale into interest earning deposits.
Interest-earning deposits at March 31, 2002 includes $27.0 million of ATM cash,
on which the Savings Bank earns a return of 200 basis points over the overnight
FHLB rate, and $49.0 million of other interest earning deposits with an
annualized yield of 6.95% at March 31, 2002.
Securities available-for-sale decreased by $25.9 million to $97.2 million at
March 31, 2002 from $123.1 at December 31, 2001 as the Company sold
approximately $27 million of its excess investment in TPS as described in Note C
Regulatory Capital Requirements and the preceding Regulatory Compliance section.
Loans held for sale decreased by $26.1 million to $39.0 million at March 31,
2002 from $65.1 million at December 31, 2001 as the Savings Bank implemented a
planned approach to reduce its purchase/repurchase loan program activity. Net
loans receivable decreased by $3.5 million to $246.9 million at March 31, 2002,
from $250.4 million at December 31, 2001, primarily due to an increase of
approximately $7.4 million in commercial loans, offset by a decrease of
approximately $10.9 million in single family mortgage loans and home equity
loans.
Premises and equipment decreased by $600,000 to $20.0 million at March 31, 2002
from $20.6 million at December 31, 2001. The decrease is attributable to
$860,000 in gross depreciation expense for the three months ended March 31,
2002, offset by additions of $230,000. Net depreciation expense recorded in the
statement of operations is $332,000 which reflects gross depreciation expense
of $860,000 less $528,000 reimbursed to the Company through its ATM partnership
activities.
12
Deposits decreased $13.6 million to $444.6 million at March 31, 2002, from
$458.2 million at December 31, 2001 as the Savings Bank initiated a strategy of
declining to renew maturing public and brokered certificates of deposit yielding
higher interest rates. The Savings Bank's deposits at March 31, 2002 consist of
$312.1 million, or 70.2%, of deposits attracted via its Internet delivery
channel, as compared to $296.3 million, or 64.7%, at December 31, 2001.
Borrowings decreased by $2.2 million to $26.1 million at March 31, 2002, from
$28.3 million at December 31, 2001, primarily due to the repayment of $2.4
million in federal funds purchased using the proceeds from the sale of
securities available-for-sale and loans held for sale.
Stockholders' equity declined by $500,000 to $17.1 million at March 31, 2002,
from $17.6 million at December 31, 2001 primarily as a result of the $561,000
after-tax net loss for the three months ended March 31, 2002. In addition, the
Company paid dividends of $104,000, received $40,000 through the exercise of
stock options and had other comprehensive income of $104,000 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,
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 $78.4
million at March 31, 2002.
Recent legislation repealed the OTS minimum liquidity ratio requirements. OTS
regulations now require the Savings Bank to maintain sufficient liquidity to
ensure the Savings Bank's safe and sound operation.
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.
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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 March 31, 2002, the Company had thirty (30) properties, totaling $1.1 million
classified as foreclosed real estate, as compared to twenty-seven (27)
properties totaling $730,000 at December 31, 2001. The underlying properties at
March 31, 2002 consisted primarily of single-family residences. The foreclosed
real estate has been written down to estimated fair value at March 31, 2002. The
total amount of loans receivable ninety (90) days or more past due at March 31,
2002, was $11.0 million or 3.90% of total loans receivable compared to $9.0
million or 2.82% of total loans at December 31, 2001. The $2.0 million increase
is comprised of a $3.0 million increase in delinquent one-to-four family loans
offset by a $1.0 million decrease in other commercial delinquent loans. The
delinquent one-to-four family loans have less credit risk due to the Bank's
loan-to-value requirement at origination. Thus management provided no loan loss
provision related to these loans in the first quarter 2002. Loans ninety (90)
days or more past due are primarily secured by one-to-four family residences.
Total non-performing assets at March 31, 2002, totaled $12.1 million or 2.32% of
total assets compared to $9.7 million or 1.81% of total assets at December 31,
2001. Excluded from these totals are $811,000 of discounted loans ninety (90)
days or more contractually past due at March 31, 2002, and $901,000 million at
December 31, 2001.
RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS
ENDED MARCH 31, 2002 AND 2001.
GENERAL
The Company recorded a net loss of ($561,000) or ($.33) per diluted share for
the three months ended March 31, 2002 compared to net income of $380,000 or $.17
per diluted share for the same period last year. The loss was primarily the
result of a $910,000 pre-tax loss on the sale of securities available for
sale. Of the $910,000 pre-tax loss on the sale of securities available for
sale $770,000 was related to the Company selling its excess investment in TPS as
discussed in Note C Regulatory Capital Requirements and the preceding Regulatory
Compliance section. In addition, net interest income after provision for loan
losses increased by $500,000 to $1.9 million from $1.4 million for the same
period last year. Non-interest expense, however, increased by $600,000 to $3.2
million from $2.6 million for the same period last year. The average outstanding
shares declined by 314,000 shares to 1,709,000 shares for the three months ended
March 31, 2002 as compared to 2,023,000 shares for the same period last year.
The decline in average shares is primarily the result of the Company
repurchasing 365,796 of its shares from Deltec Banking Corporation Limited
("Deltec") during 2001.
INTEREST INCOME
Interest income for the three months ended March 31, 2002, totaled $7.9 million,
as compared to $8.8 million for the comparable 2001 period. The $900,000
decrease was primarily the result of a 157 basis point decrease in the tax
equivalent yield on earning assets to 6.40% from 7.97%, despite the $69.0
million increase in average interest-earning assets. Earning asset yields have
declined as a result of re-pricing Prime rate based loans with each change in
the Prime lending rate. The decline in yield is also the result of the $39.0
million increase in short-term interest earning deposits which will generally
earn less than longer term assets. The average yield on earning assets was 6.25%
at the Savings Bank and 12.99% at UmbrellaBancorp, with a consolidated Company
average yield of 6.40% for the three months ended March 31, 2002.
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INTEREST EXPENSE
Interest expense for the three months ended March 31, 2002 totaled $6.0 million
as compared to $7.3 million for the comparable 2001 period. The $1.3 million
decrease was primarily the result of a 201 basis point decline in the average
cost of interest-bearing liabilities to 4.61% for the three months ended March
31, 2002 as compared to 6.62% for the same period last year, which more than
offset the $40.8 million increase in average interest bearing liabilities.
Interest-bearing liabilities include $17.1 million of 11.0% junior subordinated
debt, which the Company issued in November, 1998 and $3.0 million of
subordinated debentures issued by the Savings Bank in November 2001 with an
annualized interest rate during the quarter of 6.59%. The average cost of
interest-bearing liabilities was 4.33% at the Savings Bank and 9.75% at
UmbrellaBancorp, with a consolidated Company average cost of 4.61% for the three
months ended March 31, 2002.
NET INTEREST INCOME
Net interest income for the three months ended March 31, 2002 totaled $1.9
million as compared to $1.4 million for the comparable 2001 period. The $500,000
increase was primarily the result of a 44 basis point increase in the net
interest spread to 1.79% for the three months ended March 31, 2002 as compared
to 1.35% for the comparable 2001 period. The net interest spread was 1.92% at
the Savings Bank and 3.24% at UmbrellaBancorp, with a consolidated Company net
interest spread of 1.79%.
PROVISION FOR LOAN LOSSES
Provision for loan losses totaling $35,000 were recorded for the three months
ended March 31, 2002, as compared to $75,000 for the same period in 2001. Loan
loss reserves totaled $3.0 million or 1.06 % of net loans outstanding at March
31, 2002 compared to $3.0 million or .94% of net loans outstanding at December
31, 2001. Management believes that loan loss reserves are adequate, and will
continue to monitor the loan portfolio and substandard assets for loss exposure.
NON-INTEREST INCOME
Total non-interest income (loss) decreased $1.5 million to ($146,000) for the
three months ended March 31, 2002, as compared to $1.4 million for the three
months ended March 31, 2001. The decline was primarily the result of a $910,000
loss on the sale of securities available for sale. Of the $910,000 pre-tax loss
on the sale of securities available for sale $770,000 was related to the Company
selling its excess investment in TPS as discussed in Note C Regulatory Capital
Requirements and the preceding Regulatory Compliance section. In addition, fees
and service charges decreased $432,000 to $206,000 for the three months ended
March 31, 2002 primarily due to $130,000 of one-time purchase/repurchase loan
fees during the first quarter of 2001 and a decrease of approximately $300,000
of income related to its ATM network during first quarter 2002.
NON-INTEREST EXPENSE
Non-interest expense increased by $600,000 to $3.2 million or 2.34% of average
assets for the three months ended March 31, 2002 from $2.6 million or 2.07% of
average assets for the same period last year. The increase in operating expenses
was primarily the result of an increase in professional fees of approximately
$215,000 due to an increase in consulting and internal audit related fees, an
increase in data processing expense of approximately $200,000 due to the
Company's data processing system conversion and increased volume of Internet
transaction processing, and a one-time loss of $155,000 relating to ATM cash
losses from theft and vandalism, net of insurance proceeds.
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INCOME TAX EXPENSE
The Company recorded a tax benefit of $949,000 for the three months ended March
31, 2002 compared to a tax benefit of $192,000 for the same period last year.
The 2002 benefit is based on a tax rate of approximately 39% calculated on the
pre-tax loss of $1.5 million, plus a tax benefit derived from tax-exempt
municipal securities and tax-exempt charter school loans, plus the utilization
of affordable housing tax credits all totaling $262,000 for the three months
ended March 31, 2002.
ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 141 "Business Combinations" in June 2001. SFAS
No. 141 requires all business combinations within its scope to be accounted for
using the purchase method, rather than the pooling-of-interest method. The
provisions of SFAS No. 141 apply to all business combinations initiated after
June 30, 2001. The adoption of SFAS No. 141 will only impact the Company's
financial statements if it enters into a business combination.
The FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets", which
addresses the accounting for such assets arising from prior and future business
combinations, in June 2001. Under SFAS No. 142, goodwill arising from business
combinations will no longer be amortized, but rather will be assessed regularly
for impairment, with any such impairment recognized as a reduction of earnings
in the period identified. Other identified intangible assets, such as core
deposit intangible assets, will continue to be amortized over their estimated
useful lives. The Company adopted SFAS No. 142 on January 1, 2002. The adoption
of SFAS No. 142 did not have any impact on the Company's financial statements at
that date as the Company had no recorded goodwill at December 31, 2001.
Effective January 1, 2003, SFAS 143, "Accounting for Asset Retirement
Obligations" will apply. This statement requires that the fair value of
a liability for an asset retirement obligation be recognized in the period
incurred. The effect of this statement on the financial position and operations
of the Company is not anticipated to have a material affect.
The Company adopted SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" on January 1, 2002. The statement requires that the Company
recognize an impairment loss on long-lived assets when the carrying amount is
not recoverable and the measurement of the impairment loss is the difference
between the carrying amount and the fair value of the asset. This pronouncement
did not have a material effect on the Company's financial statements.
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. The Investment Committee, which includes members of
senior management and directors, monitors and determines the strategy of
managing the rate and sensitivity re-pricing characteristics of the individual
asset and liability portfolios the Savings Bank maintains. 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 and NPV
and its net interest margin.
Interest rate risk exposure is measured using interest rate sensitivity analysis
to determine the Savings Bank's change in NPV in the event of hypothetical
changes in interest rates, as well as interest rate sensitivity gap analysis,
which monitors the re-pricing characteristics of the Saving 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.
In an effort to reduce its interest rate risk, the Savings Bank has focused on
strategies limiting the average maturity of its assets by emphasizing the
origination of adjustable-rate mortgage loans and the purchase of adjustable
rate/floating rate U.S. agency issued mortgage backed securities and
collaterized mortgage obligations. The Savings Bank, from time to time, also
invests in long-term, fixed-rate mortgages provided it is compensated with an
acceptable spread.
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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 300 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 market value of assets and the market value of liabilities, adjusted for
the value of off-balance-sheet items. The following table presents the Saving
Bank's projected change in NPV for the various rate shocks as of December 31,
2001, which is the most recent available.
Estimated Increase
(Decrease) in NPV
Change in Estimated -----------------
Interest Rate NPV Amount Percent
------------- --- ------ -------
(Dollars in thousands)
2001:
300 basis point rise $ 28,017 $ (11,880) (30)%
200 basis point rise 31,686 (8,211) (21)
100 basis point rise 35,592 (4,305) (11)
Base scenario 39,897 --- ---
100 basis point decline 43,411 3,514 9
Due to the level of interest rates at December 31, 2001, the Company is not able
to model an additional 200 or 300 basis point decrease in rates.
The NPV is calculated by the Savings Bank 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 re-pricing of such instruments, which
may very 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.
The Savings bank does not use derivative instruments to control interest rate
risk. In addition, interest rate risk is the most significant market risk
affecting the Savings Bank. Other types of market risk, such as foreign currency
exchange risk and commodity price risk, do not arise in the normal course of the
Company's business activities and operations.
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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
A report on Form 8-K was filed on March 29, 2002 relating to the
resignation of the Principal Financial Officer and Chief Financial
Officer of the Registrant's wholly owned subsidiary, UmbrellaBank, fsb.
- --------------------------------------------------------------------------------
* 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.
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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: May 20, 2002 /s/ John G. Yedinak
----------------------- ---------------------------------
John G. Yedinak, Chief Executive
Officer, and Director
Date: May 20, 2002 /s/ Colleen A. Kitch
----------------------- ---------------------------------
Colleen A. Kitch,
Executive Vice-President
(Interim Principal Accounting
and Financial Officer)
19