EXHIBIT 13.1
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
ANNUAL REPORT
DECEMBER 31, 2002, 2001 AND 2000
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
UMBRELLA BANCORP, INC.
CORPORATE PROFILE
Umbrella Bancorp, Inc. ("Umbrella Bancorp" or "Company") (formerly known as Argo
Bancorp, Inc.) was incorporated in Delaware in August 1987, for the purpose of
acquiring UmbrellaBank, fsb, ("UmbrellaBank" or "Savings Bank") (formerly known
as Argo Federal Savings, fsb). On May 28, 2002, the Company completed the change
in the state of its incorporation from Delaware to Maryland, as approved by the
Registrant's Stockholders on April 30, 2002. 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"). The Company's business activities
currently consist of ownership of the Savings Bank, and investments in other
equity and debt securities.
UmbrellaBank is a federally chartered savings institution and was acquired by
the Company on November 17, 1987. The Savings Bank operates under the authority
of the OTS, its deposits are insured by the FDIC, and it is a member of the
Federal Home Loan Bank ("FHLB") System. UmbrellaBank's primary business is the
solicitation of savings deposits from the general public, and the purchase or
origination of loans secured by one-to-four-family residential and commercial
real estate, together with investments in a portfolio of mortgage mutual funds,
mortgage backed securities, municipal bonds and other agency securities.
UmbrellaBank's retail banking operations have been conducted from two
traditional branch facilities, as well through an Internet banking channel
operating under the name umbrellabank.com. At December 31, 2002,
umbrellabank.com deposits totaled $248.6 million and represented 88.16% of total
Company deposits of $282.0 million. Additionally, UmbrellaBank operates a
network of approximately 1,900 ATM machines in 19 states.
In October of 1998, the Company formed Argo Capital Trust Co. ("Argo Capital
Trust"), a statutory business trust formed under the laws of the State of
Delaware. In November 1998, the Company and Argo Capital Trust offered 11%
Capital Securities with a liquidation amount of $10.00 per security. The
proceeds from the offering were $17,250,000. Argo Capital Trust used the gross
proceeds from the sale of the Capital Securities to purchase Junior Subordinated
Debentures of the Company. The Junior Subordinated Debentures carry an interest
rate of 11% paid quarterly in arrears and are scheduled to mature, subject to
the Company's right to prepay the debentures under certain circumstances, on
November 6, 2028.
On June 24, 2000, the Company incorporated a wholly owned subsidiary, Argo
Redemption Corporation, an Illinois corporation ("ARC"). ARC was chartered to
effectuate, from time to time, purchases of the Company's outstanding Capital
Securities by tender, in the open market or by private agreement. Acquisitions
through the over-the-counter dealer market are anticipated to comprise the
majority of purchase activity. As of December 31, 2002, ARC held 12,700 shares
of Argo Capital Trust Preferred securities with a cost basis of $127,000.
1.
UMBRELLA BANCORP, INC.
On February 27, 2003 the Company announced its intention to repurchase from time
to time in open market as well as privately negotiated transactions shares of
the Trust's 11% securities, which trade under the symbol "ATP_P" on the American
Stock Exchange. The present authorization does not impose any specific limit on
the number of Trust securities which may be purchased, and is being undertaken
in order to reduce debt and debt-like obligations as required by the capital
plan as discussed following in the "Regulatory Compliance" and "Business Plan"
sections. The continuing payment on the Trust securities is dependent on the
Company's continuing ability to make payments on the subordinated debenture it
issued to the Trust in connection with the 1998 public offering. In the absence
of prior written approval, the Savings Bank is currently precluded from making
dividend payments to the Company under mutual agreement with the OTS.
Consequently, no assurance can be made that the Company will continue to make
dividend payments on the Trust securities.
UmbrellaBank has a wholly owned subsidiary, Dolton-Riverdale Savings Service
Corp. ("Dolton-Service"). At December 31, 2002, UmbrellaBank had an equity
investment in Dolton-Service of $1,567,000.
2.
UMBRELLA BANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth selected consolidated historical financial data
for the Company during the periods ended and at the dates indicated. This
information should be read in conjunction with the Consolidated Financial
Statements of the Company and notes thereto in the 2002 Annual Report to
Stockholders, portions of which are incorporated herein by reference.
At or For the Year Ended December 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
CONSOLIDATED FINANCIAL CONDITION DATA:
Loans receivable, net $ 116,452 $ 315,409 $ 286,523 $ 277,460 $ 245,189
Stock in Federal Home Loan Bank of Chicago 2,947 2,800 2,615 2,303 1,911
Securities 105,613 131,030 42,196 40,891 7,901
Cash and cash equivalents 71,900 37,649 94,017 37,672 10,096
Mortgage loan servicing rights 1,303 4,080 4,784 4,958 5,062
Foreclosed real estate 2,361 730 2,498 2,280 3,875
Net assets of discontinued operation -- -- -- -- 6,545
Investment in GFS preferred stock -- -- 4,000 4,600 --
Other assets 43,361 44,937 26,460 22,066 19,963
--------- --------- --------- --------- ---------
Total assets $ 343,937 $ 536,635 $ 463,093 $ 392,230 $ 300,542
========= ========= ========= ========= =========
Deposits $ 282,047 $ 458,147 $ 388,537 $ 301,673 $ 232,980
Borrowed money 22,305 28,343 18,708 40,336 21,051
Custodial escrow balances for loans serviced 7,423 9,499 8,365 5,476 5,340
Other liabilities 6,764 6,466 7,122 7,907 5,507
Junior subordinated debt 17,123 16,603 16,587 17,250 17,250
Stockholders' equity 8,275 17,577 23,774 19,588 18,414
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 343,937 $ 536,635 $ 463,093 $ 392,230 $ 300,542
========= ========= ========= ========= =========
SELECTED OPERATING DATA:
Interest income $ 26,066 $ 37,075 $ 30,071 $ 23,896 $ 17,625
Interest expense 21,036 29,477 22,813 16,014 11,367
--------- --------- --------- --------- ---------
Net interest income 5,030 7,598 7,258 7,882 6,258
Provision for loan losses 9,807 1,710 1,218 965 355
--------- --------- --------- --------- ---------
Net interest income (loss) after provision for
loan losses (4,777) 5,888 6,040 6,917 5,903
Noninterest income (loss) (1,199) 3,395 10,091 2,340 3,810
Noninterest expense 15,356 12,361 10,573 9,079 9,851
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes (21,332) (3,078) 5,558 178 (138)
Income tax expense (benefit) (9,035) (2,441) 1,227 (336) (383)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations (12,297) (637) 4,331 514 245
Discontinued operations:
Income from discontinued operation
(net of tax) -- -- -- 135 286
Gain on sale of discontinued operation
(net of tax) -- -- -- 1,928 --
--------- --------- --------- --------- ---------
Net income (loss) $ (12,297) $ (637) $ 4,331 $ 2,577 $ 531
========= ========= ========= ========= =========
Basic earnings (loss) per share - continuing operations $ (7.17) $ (.37) $ 2.16 $ .26 $ .12
Diluted earnings (loss) per share - continuing operations (7.17) (.37) 2.00 .25 .12
Basic earnings (loss) per share $ (7.17) $ (.37) $ 2.16 $ 1.32 $ .27
Diluted earnings (loss) per share (7.17) (.37) 2.00 1.25 .26
3.
UMBRELLA BANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL DATA (Continued)
At or For the Year Ended December 31,
-----------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
SELECTED FINANCIAL RATIOS AND OTHER DATA (1) (Dollars in thousands, except per share data)
Return from continuing operations on average
assets (2.58)% (0.12)% 1.05% 0.15% 0.10%
Return from continuing operations on average
equity (100.34) (3.00) 20.93 3.68 1.34
Average equity to average assets 2.57 3.99 5.00 5.54 7.58
Cash dividends paid per share $ .15 $ .20 $ .20 $ .20 $ .19
Dividend payout ratio (4) n/a n/a 9.28% 15.56% 67.61%
Stockholders' equity to total assets 2.41 3.28 5.13 5.09 6.12
Interest rate spread 1.51 2.59 2.34 2.54 3.15
Net interest margin 1.30 2.04 2.00 2.53 2.95
Noninterest expense to average assets 3.23 2.33 2.57 3.77 3.80
Nonperforming loans to net loans receivable (2) 16.15 2.82 1.56 2.25 2.80
Nonperforming assets to total assets (2) 6.40 1.81 1.50 2.12 3.45
Allowance for loan losses to nonperforming
loans (2) 21.10 33.16 54.98 25.61 14.42
Allowance for loan losses to loans receivable (3) 4.09 1.18 0.98 0.61 0.46
Ratio of net charge-offs to average loans
outstanding, 3.47 .39 0.12 0.03 0.01
excluding discounted loans
Average interest-earning assets to average
interest-bearing liabilities .96x .91x .94x 1.01x .96x
Book value per share $ 4.75 $ 10.31 $ 11.75 $ 9.75 $ 9.18
Full-service customer service facilities 2 2 2 5 5
- ----------
(1) Average balances are derived from daily average balances for 2002 and
2001 and month-end balances for all other years.
(2) The formula used to calculate the ratios excludes balances related to
the portfolio of discounted loans receivable.
(3) The formulas used to calculate the ratios exclude the portfolio of
discounted loans receivable and loans held for sale.
(4) Dividend payout ratios are not presented for 2002 and 2001 due to net
losses in those years.
4.
UMBRELLA BANCORP, INC.
MANAGEMENT'S 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.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or 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 electronic
systems, accounting principles, policies and guidelines and limitations imposed
on the Savings Bank's operations as a result of the agreed upon enforcement
action described in the "Regulatory Compliance" section following. 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.
GENERAL
Umbrella Bancorp is a unitary savings and loan holding company and is registered
as such with the OTS. The Company's business activities currently consist of
ownership of the Savings Bank, and investments in other equity and debt
securities. The Company is a Federal Housing Authority ("FHA") approved
originator and servicer, a licensed Illinois mortgage banker, and an approved
Federal National Mortgage Association ("Fannie Mae") servicer.
UmbrellaBank's primary business is the solicitation of savings deposits from the
general public, and the purchase or origination of loans secured by
one-to-four-family residential and commercial real estate, together with
investments in a portfolio of mortgage mutual funds, mortgage backed securities,
municipal bonds and other agency securities. UmbrellaBank's retail banking
operations have been conducted from two traditional branch facilities, as well
through an Internet banking channel operating under the name umbrellabank.com.
At December 31, 2002, umbrellabank.com deposits totaled $248.6 million and
represented 88.16%
5.
UMBRELLA BANCORP, INC.
of total Company deposits of $282.0 million. During January 2003, the Savings
entered into contracts for the sale of its two branch locations including the
leasehold improvements, deposits and assumption of the lease obligations. The
Savings Bank is a member of the FHLB System, and its deposits are insured to the
maximum allowable amount by the FDIC.
Prior to 2002, the Company had focused lending activities on the generation of
profits from the sale of mortgage loans. The Savings Bank's purchase repurchase
program generated originations of long-term, fixed-rate mortgage loans with 15
and 30-year maturities for immediate sale in the secondary mortgage market.
Prior to 2002, UmbrellaBank's lending activity also included the origination of
primarily adjustable rate mortgage ("ARM") loans through the offering of
portfolio ARM products in conduit activities and the purchase of ARM loans in
the secondary market. Additionally, a significant portion of the growth in
UmbrellaBank's loan balances prior to 2002 was due to origination and
participation activities relating to secured commercial real estate loans
located both in and outside UmbrellaBank's primary market area and other forms
of commercial lending. Other forms of commercial lending have included financing
the acquisition of equipment and receivables and providing working capital
loans.
During 2002, the Company's one-to-four family loan portfolio decreased $142.0
million from $195.6 million to $53.6 million at December 31, 2001 and 2002,
respectively. The Company's commercial loan portfolio decreased $55.5 million
from $113.7 million to $58.2 million at December 31, 2001 and 2002,
respectively. The decrease in the Company's outstanding loans was due to the
termination of the purchase repurchase program, significant curtailment of
commercial loan lending due to regulatory criticism and the sale of loans to
fund actual and anticipated deposit liability reductions, in accordance with the
business plan discussed below.
During 2003 and in conjunction with its business plan, the Company intends to
originate, purchase and sell fixed-rate and adjustable-rate mortgage loans
secured by one-to-four family residences. To a lesser extent, the Company plans
to originate real estate secured commercial loans (subject to regulatory
approval), home equity loans, and other consumer loans, including consumer
credit card facilities through the umbrellabank.com Internet channel.
Due to several internal and external factors, described more fully following in
the "Analysis of Allowance for Loan Losses" section, the Company incurred
provisions for loan losses and net charge-offs of $9.8 million and $8.6 million,
respectively during 2002.
Commercial real estate lending and commercial loans often entail significant
additional risks as compared with one-to-four-family residential property
lending. Commercial real estate loans typically involve larger loan balances to
a single borrower or groups of affiliated borrowers. The payment experience on
such loans is typically dependent on the successful sale or operation of the
real estate project. These risks can be significantly impacted by supply and
demand conditions in the market for housing, office and retail space, and as
such may be subject to a greater extent to adverse conditions in the economy
generally.
Investment activities by the Savings Bank are governed by the OTS, with
limitations on both quantity (as either a percent of capital or assets) and
quality (as determined by various national
6.
UMBRELLA BANCORP, INC.
rating services) prescribed under various laws, regulations and bulletins giving
effect to the regulatory framework underlying UmbrellaBank's activities in this
area. As of December 31, 2002 and 2001 the Savings Bank's available-for-sale
securities totaled $102.2 million and 115.2 million, respectively. In addition,
as of December 31, 2001 the Savings Bank held trading securities of $6.1 million
and securities held-to-maturity of $1.9 million. The overall decrease in
investment securities between December 31, 2001 and 2002 can be principally
attributable to utilizing the proceeds from sales to fund a portion of the
deposit shrinkage that occurred during 2002 related to the Saving Bank's
business plan objectives as discussed following. In addition, as discussed more
fully following, due to regulatory requests the Savings Bank ceased its trading
activity and sold certain other types of available-for-sale securities as the
Savings Bank had exceeded the regulatory limitations for holding these types of
securities.
Additionally, UmbrellaBank operates a network of approximately 1,900 ATM
machines in 19 states. The Savings Bank generates interest and fee income from a
network of regionally deployed ATMs. Deployment activities have been
concentrated primarily in the Midwest and Mid-Atlantic regions of the country,
with limited expansion in the southeastern United States and west of the
Mississippi. Revenues are derived from interchange and surcharge fees, together
with income from related leasing and interest on currency used in operations.
The Savings Bank's results of operations are dependent primarily on net interest
income, which is the difference between the interest earned on its loan and
security portfolios, and the interest paid on deposits and borrowed funds. The
Savings Bank's operating results are also affected by provisions for loan
losses, loan servicing fees, customer service charges and fees, fees from ATM
operations, gains (losses) on the sale of securities, loans and other assets and
other income. Operating expenses of the Savings Bank include employee
compensation and benefits, equipment and occupancy costs, outsourced servicing
expenses, federal deposit insurance premiums, professional fees and other
general and 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.
During 2002, the implementation of certain initiatives under the business plan
had a significant effect on the total assets and lending, investing and retail
operations of the Savings Bank and the Company. During 2002, total assets of the
Savings Bank decreased $186.6 million from $521.8 million to $335.2 at December
31, 2001 and 2002, respectively. Consolidated assets of the Company decreased
$192.7 million from $536.6 million to 343.9 million at December 31, 2001 and
2002, respectively.
REGULATORY COMPLIANCE
The OTS commenced risk-focused safety and soundness examinations of the Savings
Bank and the Bancorp on October 29, 2001 and November 14, 2001, respectively.
Each OTS Report of Examination ("ROE"), which was primarily based on financial
information as of September 30, 2001, was transmitted to the Savings Bank and
Bancorp, respectively, in March 2002.
7.
UMBRELLA BANCORP, INC.
The November 14, 2001 Holding Company Report of Examination ("Bancorp ROE") was
not limited to any one area, but focused on the risk factors of Transactions
with Affiliates, Funds Distribution, Financial Effect and Management Quality.
During the course of the OTS examination, the Bancorp addressed the specific
regulatory violations identified, and developed and implemented policies and
procedures to ensure future regulatory compliance. The OTS commented in the
Bancorp ROE on the Bancorp's level of operating losses, debt service
requirements and capital position. As a result of the findings contained in the
Bancorp ROE, the Bancorp was required to provide OTS with a quarterly financial
cash flow projection report and quarterly monitoring reports. The Bancorp was
also required to take actions to ensure future regulatory compliance, and take
actions sufficient to ensure safe and sound operations. In addition, the Bancorp
was placed under various operating restrictions, including a requirement that
the Bancorp file notice with the OTS prior to adding or replacing a director or
hiring a senior executive officer. The Bancorp was also restricted in making
"golden parachute" payments to any institution-affiliated party unless
authorized by regulation. The Bancorp has been, and is currently in compliance
with the requirements set forth by the OTS, as a result of the findings
contained in the Bancorp ROE.
The October 29, 2001, Report of Examination of the Savings Bank ("Savings Bank
ROE") focused on Capital Adequacy, Asset Quality, Management, Earnings,
Liquidity and Sensitivity to Market Risk. The OTS identified various regulatory
deficiencies resulting, in part, in supervisory imposed operating restrictions
on growth and lending activities, as well as restrictions on capital
distributions, contracts, "golden parachute" payments and changes in senior
executive positions. In addition, the Savings Bank was required to provide
reports to the OTS detailing corrective actions taken, identification of
policies and procedures adopted and implemented to remedy areas of criticism and
ensure future regulatory compliance. Management and the Board of Directors
responded to the Savings Bank ROE, and provided OTS with either assurance of
compliance with the material exceptions noted in the Savings Bank ROE or the
current status of efforts to correct matters requiring on-going remediation.
Upon completion of the November 14, 2001 Bancorp ROE and October 29, 2001
Savings Bank ROE, management officials and the Boards of Directors of both the
Bancorp and the Savings Bank engaged in active discussions with the OTS to
develop a mutually agreeable business framework designed to strengthen the
regulatory foundation of the Bancorp and the Savings Bank. As a result, in the
spirit of regulatory cooperation, the Board of Directors of both the Bancorp and
the Savings Bank, without admitting or denying that such grounds exist, or the
accuracy of the OTS findings, opinions and/or conclusions, separately agreed to
enforcement actions that became effective on August 16, 2002.
The provisions of the enforcement action between the Bancorp and OTS
established, in principal part, that the Bancorp provide the OTS with a plan for
raising additional common equity capital and restructuring outstanding debt at
the Bancorp, recognizing that economic and market conditions are outside of the
control of the Bancorp. In addition to the operating restrictions previously
placed on the Bancorp by the OTS, pursuant to the November 14, 2001 Bancorp ROE,
the agreed upon action required the Bancorp to provide the OTS with quarterly
cash flow projections for the purpose of identifying the Bancorp's sources and
uses of funds for the remainder of fiscal 2002, fiscal 2003 and fiscal 2004. The
subject enforcement action also
8.
UMBRELLA BANCORP, INC.
provides that the Bancorp ensure that all transactions with affiliates comply
with applicable statutory and regulatory requirements and that the Bancorp
maintain documentation sufficient to evidence such compliance. To date, the
Bancorp is in full material compliance with the provisions of the agreed upon
enforcement action.
The agreed upon language in the enforcement action between the Savings Bank and
the OTS provided, in principal part, for the establishment of a plan addressing
the level of the Savings Bank's fixed assets, as well as the adoption and
implementation of a capital plan for the establishment and maintenance of
acceptable capital levels. On March 24, 2003, the Savings Bank submitted to the
OTS a revised business plan which replaces the Savings Bank's previously filed
business plan, capital plan and staffing plan. The revised business plan details
the Savings Bank's overall operating strategies, in light of current economic
conditions, and the intent of the Board of Directors to reformulate and reduce
the Savings Bank's overall asset size. The agreed upon language of the
enforcement action also (without prior written approval of the OTS): prohibits
any increase in the Savings Bank's total assets during any quarter in excess of
an amount equal to net interest credited on deposit liabilities during the
quarter; and prohibits the purchase or origination of new loans other than
single-family residential mortgage loans, credit card loans and over draft lines
of credit. The Board of Directors has already taken action to alleviate many of
the issues raised by the OTS and has formalized plans, policies and procedures
concerning the Savings Bank's internal audit function, overall lending programs,
including loan administration, and refined its Allowance for Loan and Lease
Losses ("ALLL") policy and practices. In addition to the operating restrictions
previously imposed on the Savings Bank, as a result of the findings contained in
the Savings Bank ROE, the Savings Bank has developed and implemented policies
and procedures to: (i) ensure compliance with its loans to one borrower
limitation; (ii) address its classified assets; (iii) monitor its interest rate
risk; and (iv) ensure continued accurate thrift financial reports. Furthermore,
the Savings Bank has agreed not to accept, renew or roll over any brokered
deposits without the prior consent of the OTS. Beginning no later than fourth
quarter 2001, management of the Savings Bank had already initiated a plan not to
renew maturing brokered deposits. Additionally, the agreed upon action provides
for an independent loan review of the Saving Bank's construction, commercial
real estate, commercial, direct lease financing and broker purchase/repurchase
lending programs. Such independent loan review is in its final stages. Of
additional note, the Savings Bank will continue to utilize its Board of
Directors Joint Oversight Committee for the purpose of reviewing and approving
new lending and investment initiatives. To date, the Savings Bank is in full
material compliance with the provisions of the agreed upon enforcement action.
In addition, selected provisions of the mutually agreed upon enforcement action
have been modified, or activities approved, by the OTS at the express request of
the Savings Bank.
On May 20, 2002, the OTS and FDIC began a joint Field Visit examination in
preparation for a joint risk-focused examination of the Savings Bank. According
to the OTS/FDIC regulators, the purpose of the Field Visit was, in part, to
obtain an initial assessment of the asset quality and capital levels of the
Savings Bank to determine the effectiveness of corrective actions taken by the
Board of Directors and management since the issuance of the Savings Bank ROE,
and establish the scope for the full joint risk-focused examination of the
Savings Bank and the Bancorp, each of which commenced on July 1, 2002.
9.
UMBRELLA BANCORP, INC.
The OTS and FDIC initiated a risk-focused examination of the Savings Bank on
July 1, 2002 focusing on the examination components of capital, assets,
management, earnings, liquidity and sensitivity, and represented a continuation
of the previous Field Visit. During the course of the examination,
representatives of the Savings Bank, as well as members of the Board of
Directors, met regularly and informally with representatives of both the OTS and
FDIC to address issues, provide informational updates and enhance the existing
avenues of communication that had been previously established. During the course
of the examination, on September 17, 2002, the OTS issued a letter to the
Savings Bank requiring, in part, the Savings Bank to i) establish position and
loss limits for its available-for-sale investment portfolio; ii) reduce its
borrowings under reverse repurchase agreements and margin debt to $0 and
discontinue their use other than the permitted use of reverse repurchase
agreements up to $10 million for liquidity purposes; iii) reduce its investment
in a pass through investment mutual fund to a predetermined percentage; iv)
suspend its trading portfolio; and v) revise its Investment Policy accordingly.
Also during the examination, the OTS and FDIC, in part, raised and discussed
with management concerns over the Savings Bank's staffing levels, overall level
of expenses, long-term earnings potential and the effect of earnings on the
Savings Bank's long-term capital position. Any issues identified by the OTS and
FDIC examiners during the course of the July 1, 2002 examination were addressed,
and appropriate action was taken by the Savings Bank, or is currently being
taken by the Savings Bank's management in consultation with the OTS. The July 1,
2002 examination of the Savings Bank culminated in a routine exit meeting with
representatives from the Savings Bank, OTS and FDIC.
Also on July 1, 2002, the OTS commenced a risk-focused examination of the
Bancorp, focusing primarily of the Bancorp's financial condition and represented
a continuation of the previous Field Visit. As with the Savings Bank
examination, members of the Bancorp's management team, as well as members of the
Board of Directors, met regularly and informally with representatives of the OTS
to address issues, provide informational updates and enhance the existing
avenues of communication previously established. During the examination, the OTS
discussed its concerns with management regarding issues including, but not
limited to, earnings, its leverage position, investment strategies, liquidity
and capital. Any issues raised by OTS during the examination were addressed
during the examination by management and continue to be of primary focus by the
Board of Directors. The July 1, 2002 examination culminated in a routine exit
meeting with representatives from the Bancorp and OTS, as well as
representatives from the FDIC.
As part of the continuing regulatory spirit of cooperation and the mutual desire
for future success, both the Bancorp and the Savings Bank are providing reports
to, and consulting with, the OTS on all matters addressed under the agreed upon
enforcement actions and issues raised during the aforementioned examinations.
10.
UMBRELLA BANCORP, INC.
BUSINESS PLAN
During November 2002, the Board of Directors of the Bancorp and Savings Bank
approved plans for increasing capital levels at both the Bancorp and Savings
Bank as well as a business plan at the Savings Bank level which outlined the
future operating strategies of the Savings Bank to achieve the targeted capital
levels along with providing the framework for achieving profitability. The plans
were delivered to the OTS for their review and approval. To achieve the targeted
capital levels and profitability levels the business plan of the Savings Bank
highlighted the following actions; (1) reduction of total assets to $250 million
by March 31, 2003, to be achieved through the reduction of deposits by the
selling of the Savings Bank's branch deposits and operations, rate reductions
and the early redemption of brokered deposits with corresponding decreases in
loans and investments; (2) the elimination of certain lending programs; (3) a
restructuring of the Savings Bank's statement of financial condition to achieve
the desired mix of interest earning assets and interest bearing liabilities; (4)
staff and management reductions; (5) consolidation of personnel into one
facility to achieve overhead reductions and economies of scale; (6) reductions
in general and administrative expenses; and (7) capital infusions from the
Bancorp. The increase in capital levels at the Bancorp is to be achieved through
capital infusions from current principal shareholders and potential third party
investors.
On February 28, 2003, the Savings Bank withdrew its business plan previously
submitted to the OTS. On March 24, 2003 the Board of Directors submitted a
revised Savings Bank business plan to the OTS for their review and nonobjection.
The revised business plan includes significant further reductions of total
assets by December 31, 2003. To achieve the revised business plan balance sheet
reductions, the Savings Bank and the Company will continue to identify
additional assets to be held for sale. Based on the Savings Bank's initial
analysis, the fair value of assets to be held for sale exceeds the book value.
FINANCIAL CONDITION
Total assets decreased $192.7 million to $343.9 million at December 31, 2002
from $536.6 million at December 31, 2001. Proceeds from the sale of securities
available-for-sale and principal repayments on loans receivable as well as
proceeds from loan sales were used to fund the $176.1 million decrease in
deposits, consisting primarily of a $104.6 million decrease in brokered
certificates of deposit ("CDs") and a $47.4 million decrease in money market
accounts. Of the $104.6 million decrease in high yielding/costing brokered CDs,
$55.7 million is attributable to the Savings Bank's effort not to renew maturing
brokered CDs yielding higher interest rates and the Savings Bank's early
redemption of $48.9 million of brokered CDs during September and December 2002.
In addition, the Company recorded a $9.8 million provision for loan losses and a
$2.6 million valuation reserve on its purchased mortgage servicing rights
("PMSRs") during the year ended December 31, 2002, as described in the Results
of Operations section following. Borrowed money also decreased by $6.0 million
at December 30, 2002, as compared to December 31, 2001.
11.
UMBRELLA BANCORP, INC.
Cash and interest-earning deposits increased by $34.3 million to $71.9 million
at December 31, 2002 from $37.6 million at December 31, 2001. The increase was
attributable to the Company maintaining liquidity at December 31, 2002 until the
proceeds from loan sales closed during the last week of December could be
reinvested in securities.
LENDING ACTIVITIES
As shown in the following table, loans receivable, which includes loans held for
sale and discounted loans receivable, decreased $196.7 million in 2002 from
$319.2 million at December 31, 2001 to $122.5 million at December 31, 2002. As
of December 31, 2002, loans held for sale consisted of loans under the purchase
repurchase program and loans held for sale-other as described in the following
paragraph. Loans held for sale-purchase repurchase as of December 31, 2002 and
2001 were $647,000 and $65.1 million, respectively, and are included in
one-to-four family mortgage loans. During the third quarter of 2002, the Company
decided to cease its lending activity under the purchase repurchase program as a
result of regulatory dissatisfaction with, and criticisms of, the program and
considering the profitability of the program. The termination of the purchase
repurchase loan program was completed in January 2003. Based on the sales prices
received the actual gains on these sales was not significant to operations.
Loans held for-sale-other, which totaled $19.8 million as of December 31, 2002,
consists of $2.1 million of one-to-four family mortgage loans and $17.7 million
of commercial loans which the Company has identified as held for sale in
conjunction with the Company's business plan. Based on the bid prices received,
the actual and anticipated gain on these sales is not expected to be significant
to future operations.
During 2002, $73.7 million of loans held for sale-other were transferred from
the loans receivable portfolio and were recorded at the lower of cost or fair
value with no resulting loss on transfer. $53.8 million of these loans were sold
prior to December 31, 2002.
In addition, further contributing to the overall reduction in loans receivable
was the fact that the Company experienced minimal loan originations or purchases
of loan pools during the second half of the year as the funds received from loan
payments were utilized to fund deposit reductions.
The following table sets forth the composition of the Company's loan portfolio,
including loans held for sale, in dollar amounts and in percentages of the
portfolio at the dates indicated.
12.
UMBRELLA BANCORP, INC.
At December 31,
-------------------------------------------------------------------
2002 2001 2000
--------------------- ---------------------- ---------------------
Amount % of Total Amount % of Total Amount % of Total
------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
Mortgage loans:
One-to four-family (2) ........... $ 54,637 44.59% $ 195,603 61.28% $217,444 75.02%
Commercial multi-family secured
real estate...................... 10,799 8.81 38,722 12.13 41,872 14.44
--------- ------ --------- ------ -------- ------
Total mortgage loans............ 65,436 53.40 234,325 73.41 259,316 89.46
Other loans
Commercial (2).................... 47,182 38.51 74,986 23.48 22,947 7.92
Home equity....................... 4,219 3.44 4,304 1.35 4,436 1.53
Direct financing leases........... 4,029 3.29 4,368 1.37 2,288 .79
Other............................. 1,654 1.36 1,235 .39 856 .30
--------- ------ --------- ------ -------- ------
Total other loans............... 57,084 46.60 84,893 26.59 30,527 10.54
--------- ------ --------- ------ -------- ------
Total loans receivable (1)...... 122,520 100.00% 319,218 100.00% 289,843 100.00%
====== ====== ======
Less:
Unearned discounts and
premiums and deferred loan
fees, net....................... 1,920 825 880
Allowance for loan losses......... 4,148 2,984 2,440
--------- -------- --------
Loans receivable, net........... $ 116,452 $315,409 $286,523
========= ======== ========
At December 31,
------------------------------------------------
1999 1998
---------------------- ----------------------
Amount % of Total Amount % of Total
------ ---------- ------ ----------
(Dollars in Thousands)
Mortgage loans:
One-to four-family (2) ........... $249,542 88.99% $233,461 93.64%
Commercial multi-family secured
real estate...................... 13,887 4.95 2,179 .87
-------- ------ -------- ------
Total mortgage loans............ 263,429 93.94 235,640 94.51
Other loans
Commercial (2).................... 9,521 3.39 6,577 2.65
Home equity....................... 4,738 1.69 4,013 1.61
Direct financing leases........... 1,566 .56 1,207 .48
Other............................. 1,168 .42 1,864 .75
-------- ------ -------- ------
Total other loans............... 16,993 6.06 13,661 5.49
-------- ------ -------- ------
Total loans receivable (1)...... 280,422 100.00% 249,301 100.00%
====== ======
Less:
Unearned discounts and
premiums and deferred loan
fees, net....................... 1,411 3,172
Allowance for loan losses......... 1,551 940
-------- --------
Loans receivable, net........... $277,460 $245,189
======== ========
- ----------
(1) Includes loans receivable, loans held for sale and discounted loans
receivable.
(2) Includes loans held for sale of $20.4 million, $65.1 million, $38.9
million, $18.9 million, and $31.0 million at December 31, 2002, 2001,
2000, 1999, and 1998.
13.
UMBRELLA BANCORP, INC.
The following table shows the remaining maturities or period to repricing of the
Company's loan portfolio at December 31, 2002. Loans that have adjustable rates
are shown as being due in the period during which the interest rates are next
subject to change.
Loans
----------------------------------------------------------------------------------------
(Dollars In Thousands)
Commercial Direct
One-to- Real Commercial Home Financing
Four-Family Estate Loans Equity Leases Other Total
----------- ------ ----- ------ ------ ------ -----
AMOUNTS DUE:
Within one year $ 16,671 $ 10,453 $ 18,723 $ 345 $ 358 $ 1,637 $ 48,187
After one year:
One to three years 4,426 -- 8,047 675 35 17 13,200
Three to five years 1,248 346 7,083 1,733 1,705 -- 12,115
Five to ten years 1,840 -- 1,048 1,466 1,089 -- 5,443
Ten to twenty years 10,169 -- 12,281 -- 842 -- 23,292
Over 20 years 20,283 -- -- -- -- -- 20,283
-------- -------- -------- -------- -------- -------- --------
Total due after one year 37,966 346 28,549 3,874 3,671 -- 74,333
-------- -------- -------- -------- -------- -------- --------
Total loans receivable $ 54,637 $ 10,799 $ 47,182 $ 4,219 $ 4,029 $ 1,654 $122,520
======== ======== ======== ======== ======== ======== ========
The following table sets forth at December 31, 2002, the dollar amount of all
loans due after December 31, 2003, and whether such loans have fixed or
adjustable interest rates.
Fixed Adjustable
Rates Rates Total
----- ----- -----
(In thousands)
Mortgage loans:
One-to-four-family $32,370 $ 5,579 $37,949
Commercial real estate -- 346 346
Commercial loans 14,352 14,324 28,676
Home equity loans -- 3,674 3,674
Direct financing leases 2,820 851 3,671
Direct financing leases -- 17 17
------- ------- -------
Total $49,542 $24,791 $74,333
======= ======= =======
14.
UMBRELLA BANCORP, INC.
Problem Assets and Asset Classification. In accordance with Federal regulations,
loans and other assets are reviewed by the Company on a regular basis for a
determination of need to classify such assets. There are three classifications
for problem assets: Substandard, Doubtful and Loss. An asset is considered
"Substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor, or the current realizable value of the
collateral pledged. Substandard assets include those characterized by the
"distinct possibility" that the Company will sustain "some loss" if the
deficiencies noted are not corrected. Assets classified as "Doubtful" have all
the weaknesses inherent in those classified as Substandard, with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of "currently existing facts, conditions and values,"
"highly questionable and improbable." Assets classified as "Loss" are those with
weaknesses and characteristics considered "uncollectible" and of such little
value that their continuance as assets without the establishment of a specific
loss reserve is not warranted. An allowance for losses is established in amounts
deemed prudent by management. When an asset is classified as Loss, the Company
is required to establish a specific allowance for such losses equal to 100% of
the amount of the asset so classified, or to charge-off such amount. The
Company's policy is to stop accruing interest for any loan in excess of 90 days
delinquent separate from management's analysis as to the future collectibility
of interest.
At December 31, 2002, UmbrellaBank had $26.0 million of loans classified as
Substandard or Doubtful, with no Loss assets at December 31, 2002. The Company
recorded a provision for loan losses of $9.8 million during 2002, consisting of
$8.0 million recorded by the Savings Bank and $1.8 million recorded by Umbrella
Bancorp. Factors considered by management in providing for loan losses in 2002
are discussed in the following section titled "Analysis of Allowance for Loan
Losses".
In addition, at December 31, 2002 UmbrellaBank had $2.4 million of real estate,
net of $328,000 of specific reserves, acquired through foreclosure or deed in
lieu of foreclosure ("REO"), which was comprised of 52 properties. REO or real
estate in judgment is carried at the lower of the fair market value less cost to
dispose or the related loan balance at the date of foreclosure. An allowance for
loss has been established by a charge to operations or a transfer from the
allowance for loan losses where the carrying value of REO exceeds its fair value
less cost to dispose.
NONACCRUAL AND PAST-DUE LOANS. The following table sets forth information
regarding nonaccrual loans and REO. It is the policy of the Savings Bank to
cease accruing interest on loans 90 days or more past due. For the years ended
December 31 presented below, the amount of interest income that would have been
recognized on nonaccrual loans is immaterial to the financial statements. As of
the dates shown, UmbrellaBank had no restructured loans.
15.
UMBRELLA BANCORP, INC.
At December 31,
-------------------------------------------------------------------
(Dollars in Thousands)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Nonperforming loans (1) $ 19,663 $ 9,000 $ 4,438 $ 6,039 $ 6,518
Foreclosed real estate, net 2,361 730 2,498 2,280 3,875
---------- --------- --------- --------- ----------
Total nonperforming assets $ 22,024 $ 9,730 $ 6,936 $ 8,319 $ 10,393
========== ========= ========= ========= ==========
Allowance for loan losses as a
percentage of net loans receivable, excluding loans
held for sale (1) 4.09% 1.18% .98% .61% .46%
Allowance for loan losses to nonperforming
loans (1) 21.10 33.16 54.98 25.68 14.42
Nonperforming loans as a percentage of
loans receivable (1) 16.15 2.82 1.59 2.25 2.80
Nonperforming assets as a percentage of
total assets 6.40 1.81 1.50 2.12 3.45
- ----------
(1) All nonperforming loan totals exclude discounted loans receivable ninety
days or more past due which at December 31, 2002, 2001, 2000, 1999, and
1998 amounted to $331,000, $901,000, $1.0 million, $1.7 million, and $3.0
million. All net loan totals exclude discounted loans receivable, which at
December 31, 2002, 2001, 2000, 1999, and 1998 amounted to $793,000, $4.9
million, $7.1 million, $9.1 million, and $12.4 million.
16.
UMBRELLA BANCORP, INC.
The following table sets forth delinquencies in UmbrellaBank's loan portfolio as
of the dates indicated:
At December 31, 2002
---------------------------------------------------------------
30-89 Days 90 Days or More
----------------------------- ---------------------------
Loans Loans
Number Receivable, Number Receivable,
of Loans Net of Loans Net
-------- ------- -------- -------
(Dollars in Thousands)
Mortgage loans:
One-to-four-family........... 35 $ 2,699 160 $14,604
Commercial multi-family
secured real estate........ -- -- 3 2,354
------- ------- ------- -------
Total mortgage loans......... 35 2,699 163 18,848
Commercial................... 1 1,559 5 2,352
Home equity.................. -- -- 4 149
Direct financing leases...... -- -- -- --
Other........................ 3 9 5 24
------- ------- ------- -------
Total.................... 39 $ 4,267 177 $19,663
======= ======= ======= =======
Delinquent loans to total
loans receivable (1)......... 3.51% 16.15%
==== =====
- ----------
(1) Excludes balances related to portfolio of discounted loans receivable.
17.
UMBRELLA BANCORP, INC.
At December 31, 2001 At December 31, 2000
-------------------------------------------------- -------------------------------------------------
30-89 Days 90 Days or More 30-89 Days 90 Days or More
Loans Loans Loans Loans
Number Receivable, Number Receivable, Number Receivable, Number Receivable,
of Loans Net of Loans Net of Loans Net of Loans Net
-------- ------ -------- ------ -------- ------ -------- ------
(Dollars in Thousands)
Mortgage loans:
One-to four-family....... 54 $4,544 48 $7,161 69 $3,551 66 $4,257
Commercial multi-family
secured real estate..... -- -- 2 1,064 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total mortgage loans..... 54 4,544 50 8,225 69 3,551 66 4,257
Home equity.............. -- -- 2 601 6 179 1 74
Commercial loans......... -- -- 2 77 -- -- -- --
Direct financing leases.. -- -- -- -- -- -- -- --
Other loans.............. 6 35 19 97 -- -- 4 107
------ ------ ------ ------ ------ ------ ------ ------
Total................ 60 $4,579 73 $9,000 75 $3,730 71 $4,438
====== ====== ====== ====== ====== ====== ====== ======
Delinquent loans to total
loans receivable (1)..... 1.43% 2.82% 1.33% 1.59%
==== ==== ==== ====
- ----------
(1) Excludes balances related to portfolio of discounted loans receivable.
18.
UMBRELLA BANCORP, INC.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is
maintained at a level determined to be adequate by management to absorb probable
incurred credit losses. Determination of an appropriate level of allowance for
loan losses necessarily involves a high degree of judgment. Primary
considerations in this evaluation are prior loan loss experience, the character
and mix of the loan portfolio, adverse situations which may affect a borrower's
ability to repay, size of the loan portfolio, peer group information, business
and economic conditions and management's estimate of probable incurred losses.
While management uses all available information, including the monitoring of the
economic conditions in the geographic regions in which the loan portfolio is
located, future additions to the allowance may be necessary based on estimates
that are susceptible to significant revision as a result of changes in economic
conditions and other factors. Additionally, various regulatory agencies, as an
integral part of their examination process, periodically review UmbrellaBank's
allowance for loan losses. Such agencies may require UmbrellaBank to recognize
additions to the allowance based on their judgment of information available to
them at the time of their examination.
The allowance for loan losses balance at December 31, 2002 was $4.1 million as
compared to $3.0 million at December 31, 2001. During 2002, the Company incurred
provisions for loan losses and net charge-offs of $9.8 million and $8.6 million,
respectively as compared to $1.7 million and $1.2 million during 2001.
The significant provisions and charge-offs recorded during 2002 can be
attributable to several internal and external factors, as described below:
During the second quarter 2002, the Savings Bank started and completed the
conversion of its commercial loan portfolio, which totaled $126.6 million as of
March 31, 2002, to a new loan software subsidiary ledger system. As part of that
conversion, the Savings Bank performed an extensive review of its loan files,
payment histories, delinquency reporting and its loan classification reporting
(e.g. special mention, substandard, doubtful and loss). The results of these
procedures indicated that the Savings Bank's loan files related to certain loans
were missing required documentation in accordance with the Savings Bank's
underwriting standards. Management downgraded any loans where sufficient
supporting documentation was not currently in the loan file. In addition,
certain payment histories did not accurately reflect the loan's current payment
status, and as such, the Savings Bank's delinquency reporting and loan
classification reporting excluded certain loans. Accordingly, these loans were
either classified for the first time or downgraded during the quarter ended June
30, 2002.
In addition, during the second quarter of 2002, commercial loan borrowers with
loans totaling approximately $3.6 million either declared, or it was anticipated
that they would likely declare bankruptcy. Although some of these loans had been
previously classified, management downgraded these loans in the second quarter
of 2002 due to the actual and likely bankruptcy filings and recorded a provision
related to these loans totaling $1.9 million, of which $1.6 million was
subsequently charged-off. The remaining $2.0 million of loans that were not
charged off consist of two loans. The first is a loan with a remaining balance,
as of December 31, 2002 of $1.5 million, with an allowance allocation of
$220,000. This loan is secured by leases on consumer "photo center" equipment
deployed in a national retailer. Management anticipates that during April 2003
the national retailer will reaffirm its obligation under these leases as part
19.
UMBRELLA BANCORP, INC.
of its emergence from bankruptcy. The second is a loan with a remaining balance,
as of December 31, 2002 of $364,000, with an allowance allocation of $55,000,
and is secured by single family real estate. The Company also provided for and
charged off $2.5 million related to one loan relationship during the second
quarter of 2002. Based upon financial information received during the second
quarter 2002 related to this borrower, updated information received related to
the collateral for certain of these loans, and updated information related to
the borrower's business as a whole, the Company charged off the entire
relationship balance in question and is pursuing recovery. Management intends to
actively seek recovery of charged off loan assets through legal proceedings.
Management also increased its allowance factors within all commercial loan
classifications, based on current economic factors.
During the third quarter 2002, the Savings Bank charged-off $2.5 million related
to loans or pools of loans which it had previously provided an allowance of $1.0
million. The most significant was a $3.0 million commercial non-residential loan
in which $1.9 million was charged-off, $900,000 of which had previously been
reserved. During the third quarter, the principal of the company which was
developing the property was indicted for bank fraud related to his financial
dealings with another financial institution. The Company intends to pursue all
avenues against the principal of the development company and his professional
service firms to recover its investment in this loan; however, as of September
30, 2002 the loan was written down to its fair value based on recent appraisals
of the land collateralizing the loan. During March 2003, the Company received
title to this property.
During 2002, delinquencies increased in the single-family mortgage loan
portfolio. The total amount of single-family mortgage loans ninety (90) days or
more past due at December 31, 2001, March 31, 2002, June 30, 2002, September 30,
2002 and December 31, 2002 were $7.6 million, $10.6 million, $14.6 million,
$16.6 million and $14.9 million, respectively. Management believes these
increases are attributable to a declining economy and higher unemployment
levels. To address this situation, the Savings Bank lowered the classification
on certain pools of loans and also increased its allowance factors within
certain single-family loan classifications.
During the fourth quarter of 2002, the Savings Bank recaptured $500,000 of
provision for loan losses recorded in previous quarters mainly related to the
successful termination of the purchase/repurchase loan program. As of September
30, 2002 the purchase repurchase portfolio had an allowance for loan losses
allocation of $413,000. The program termination was completed January 2003 with
no losses incurred.
Nonaccrual loans as a percentage of gross loans increased from 2.82% to 16.75%
as of December 31, 2001 and 2002, respectively. The increase is due to the
increased delinquent loans as discussed above and the $196.7 million decrease in
gross loans receivable which is significantly related to the business plan
objectives. During 2003, management anticipates the nonaccrual loans will be
sold or transferred to foreclosed real estate for their ultimate disposition.
20.
UMBRELLA BANCORP, INC.
As discussed more fully in the Regulatory Compliance section of the MD&A, during
May 2002, the OTS and the FDIC began a joint Field Visit examination in
preparation for a joint risk-focused examination of the Savings Bank and the
Bancorp, which commenced on July 1, 2002, and completed January 31, 2003. This
examination follows the safety and soundness examinations by the OTS of the
Savings Bank and Bancorp completed January 2002, for which the Reports of
Examinations were delivered to the Savings Bank and Bancorp in March 2002 and in
which no loans were classified as "loss" assets.
During the most recent joint OTS/FDIC safety and soundness examination,
management met with the OTS/FDIC representatives numerous times. Based on those
meetings, management believes that the loans have been properly graded by
management and the Company's analysis of its ALLL, as of December 31, 2002, has
properly considered the concerns conveyed by the OTS/FDIC representatives
related to the status of the Savings Bank's loan files, delinquency reporting,
and loan classification reporting. Based on these factors, management believes
that the ALLL as of December 31, 2002 is adequate.
Management has taken the following steps to improve its ALLL reporting,
delinquent loan reporting and its loan classification reporting: 1) as
previously discussed, the Savings Bank completed the conversion of its
commercial loan portfolio to a new loan software subsidiary ledger system; as
part of that conversion, all commercial loans were re-amortized to determine
that the principal and accrued interest balances were accurate (requiring
minimal adjustment to either the principal or accrued interest), and all other
significant information (such as origination date, interest rate, maturity date,
payment dates, etc.) was re-verified to source documents such as the original
note or payment tickets; and 2) during the period July 2002 to October 2002, the
Savings Bank has expanded its commercial loan department by hiring several
mid-level managers to effectively monitor and evaluate the commercial loan
portfolio.
21.
UMBRELLA BANCORP, INC.
Allowance for Loan and Lease Loss Allocation
2002 2001 2000
------------------------------ ------------------------------ ------------------------------
Percent of Percent of Percent of
Loans Loans Loans
Percent of in Each Percent of in Each Percent of in Each
Allowance Category Allowance Category Allowance Category
to Total to Total to Total to Total to Total to Total
Amount Allowance Gross Loans Amount Allowance Gross Loans Amount Allowance Gross Loans
------ --------- ----------- ------ --------- ----------- ------ --------- -----------
One-to-four-family mortgage loans $2,020 48.70% 44.59% $1,534 51.41% 61.28% $1,678 68.77% 75.02%
Commercial real estate loans 372 8.97 8.81 329 11.03 12.13 440 18.03 14.44
Commercial 1,441 34.74 38.51 915 30.66 23.48 71 2.91 7.92
Home equity 30 .72 3.44 34 1.14 1.35 47 1.93 1.53
Direct lease financing 246 5.93 3.29 9 .30 1.37 194 7.95 0.79
Other 39 .94 1.36 111 3.72 0.39 10 .41 0.30
Unallocated -- -- -- 52 1.74 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses $4,148 100.00% 100.00% $2,984 100.00% 100.00% $2,440 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
1999 1998
------------------------------------ ------------------------------------
Percent of Percent of
Loans Loans
Percent of in Each Percent of in Each
Allowance Category Allowance Category
to Total to Total to Total to Total
Amount Allowance Gross Loans Amount Allowance Gross Loans
------ --------- ----------- ------ --------- -----------
One-to-four-family mortgage loans $1,298 83.69% 88.99% $ 687 73.08% 93.64%
Commercial real estate loans 14 0.90 4.95 14 1.49 0.87
Commercial 216 13.93 3.39 216 22.98 2.65
Home equity -- -- 1.69 -- -- 1.61
Direct lease financing -- -- 0.56 -- -- 0.48
Other 23 1.48 0.42 23 2.45 0.75
Unallocated -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total allowance for
loan losses $1,551 100.00% 100.00% $ 940 100.00% 100.00%
====== ====== ====== ====== ====== ======
22.
UMBRELLA BANCORP, INC.
The following table sets forth information with respect to the Company's
allowance for loan losses by loan category for the years and at the dates
indicated.
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Balance at beginning of year: $ 2,984 $ 2,440 $ 1,551 $ 940 $ 814
Provision for loan losses: 9,807 1,710 1,218 965 355
Purchased allowance on one-to-four-
family loans -- -- -- -- 30
Gross charge-offs:
Mortgage loans:
One-to-four-family ...................................... (3,170) (1,014) (329) (354) (259)
Commercial real estate .................................. -- -- -- -- --
Commercial ................................................ (5,266) -- -- -- --
Direct finance leases ..................................... -- -- -- -- --
Home equity ............................................... -- -- -- -- --
Other ..................................................... (311) (152) -- -- --
------- ------- ------- ------- -------
Total ................................................... (8,747) (1,166) (329) (354) (259)
------- ------- ------- ------- -------
Recoveries - other 104 -- -- -- --
------- ------- ------- ------- -------
Balance at end of year: $ 4,148 $ 2,984 $ 2,440 $ 1,551 $ 940
======= ======= ======= ======= =======
Ratio of net charge-offs during the period to
average loans outstanding, excluding discounted
loans 3.47% .39% .12% .03% .01%
======= ======= ======= ======= =======
Ratio of allowance for loan losses to net loans
receivable, excluding discounted loans and
loans held for sale ....................................... 4.09% 1.18% .98% .61% .46%
======= ======= ======= ======= =======
23.
UMBRELLA BANCORP, INC.
INVESTMENT ACTIVITIES
As of December 31, 2002 and 2001 the Company's available-for-sale securities
totaled $105.6 million and $123.1 million, respectively. In addition, as of
December 31, 2001 the Company held trading securities of $6.1 million and
securities held-to-maturity of $1.9 million. The overall decrease in investment
securities between December 31, 2001 and 2002 can be principally attributable to
utilizing the proceeds from sales to fund a portion of the deposit shrinkage
that occurred during 2002 related to the Saving Bank's business plan objectives
as discussed previously. In addition, as previously discussed in the "Regulatory
Compliance" section, due to regulatory requests the Savings Bank ceased its
trading activity and sold certain other types of available-for-sale securities
as the Savings Bank had exceeded the regulatory limitations for holding these
types of securities.
Securities available-for-sale, which totaled $105.6 million at December 31,
2002, are carried at fair value and include $71.0 million of mortgage-backed
securities and collateralized mortgage obligations, $4.3 million of trust
preferred securities, $3.5 million of marketable equity securities, $20.4
million of U.S. Agency securities, $4.5 of municipal securities, and $2.0
million of corporate bonds. Included in mortgage-backed securities and
collateralized mortgage obligations (CMOs) are Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC")
and Government National Mortgage Association ("GNMA") securities, as well as
mortgage mutual funds managed by Shay Assets Management, Inc. and The Vanguard
Group. Of the $71.0 million, investments in the Shay AMF Funds and Vanguard GNMA
fund totaled $27.0 million and $3.5 million, respectively. There were no other
concentrations by issuer at December 31, 2002.
The Company had been actively trading the marketable equity securities of the
FNMA, FHLMC, and Annaly Mortgage common stock during 2001 and most of the first
three quarters of 2002. As discussed in the preceding "Regulatory Compliance"
section, effective September 17, 2002, the trading portfolio was discontinued
and the respective securities were classified as available-for-sale. The total
amortized cost of these securities totaled $878,000 at the date of transfer.
24.
UMBRELLA BANCORP, INC.
The following table sets forth the composition of the Company's
available-for-sale portfolio in dollar amounts and percentages at the dates
indicated.
At December 31,
-------------------------------------------------------------
2002 2001 2000
-------------------------------------------------------------
Fair % of Fair % of Fair % of
Value Total Value Total Value Total
-------- ------ -------- ------ ------- ------
DEBT SECURITIES:
U.S. government agency obligations $ 20,360 19.28% 2,975 2.42% $ 5,419 37.18%
Municipal bonds 4,475 4.24 18,745 15.23 375 2.57
Corporate bonds 197 1.87 4,684 3.80 1,623 11.14
Mortgage-backed securities and
collateralized mortgage obligations 71,038 67.26 49,240 39.99 1,593 10.94
-------- ------ -------- ------ ------- ------
Total debt securities 97,845 92.65 75,644 61.44 9,010 61.83
Equity securities 3,465 3.28 15,199 12.35 2,914 19.99
Trust preferred securities 4,303 4.07 32,275 26.21 2,650 18.18
-------- ------ -------- ------ ------- ------
Total securities available-for-sale $105,613 100.00% $123,118 100.00% $14,574 100.00%
======== ====== ======== ====== ======= ======
FHLB of Chicago stock $ 2,947 100.00% $ 2,800 100.00% $ 2,615 100.00%
======== ====== ======== ====== ======= ======
The following table sets forth the composition of the Company's held-to-maturity
securities portfolio in dollar amounts and percentages at December 31, 2002,
2001, and 2000.
2002 2001 2000
----------------- -------------------- ------------------
Amortized % of Amortized % of Amortized % of
Cost Total Cost Total Cost Total
--------- ----- ---------- ------- -------- ------
Corporate bonds $ - -% $ 685 36.85% $ 778 2.93%
U.S. agency securities - - 1,174 63.15 24,451 92.19
Collateralized mortgage obligations - - - - 1,294 4.88
--------- ----- ---------- ------- -------- ------
Total securities held-to-maturity $ - -% $ 1,859 100.00% $ 26,523 100.00%
========= ===== ========== ======= ======== ======
25.
UMBRELLA BANCORP, INC.
The table below sets forth certain information regarding the amortized cost,
weighted average yields and contractual maturities of securities as of December
31, 2002.
More than One Year More than Five Years More than Ten
One Year or Less to Five Years to Ten Years Years Total
----------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
----------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE:
U.S. government and
agency obligations $ - -% $ - -% $ 1,216 6.23% $ 18,999 6.03% $ 20,215 6.04%
Municipal bonds - - - - 822 9.05 3,652 4.99 4,474 5.74
Corporate bonds - - - - 444 6.32 1,572 7.20 2,016 7.00
Trust preferred securities - - - - - - 4,480 13.71 4,480 13.71
Mortgage-backed
Securities and CMOs(2) 30,510 4.46 - - - - 40,627 3.37 71,137 3.84
Equity securities (1) 3,548 - - - - - - - 3,548 -
------- ------ ------ ---- ------- ----- -------- ----- -------- ------
Total available-
for-sale $34,058 4.46% $ - -% $ 2,482 7.18% $ 69,330 4.94% $105,870 4.85%
======= ====== ======= ======== ========
- ---------------
(1) Weighted average yield does not include equity securities.
(2) Mortgage-backed securities with maturities less than one year are
comprised of investments in Shay & Vanguard mortgage mutual funds
totaling $30.5 million.
26.
UMBRELLA BANCORP, INC.
PURCHASED MORTGAGE SERVICING RIGHTS AND INVESTMENT IN LIMITED PARTNERSHIP
The cost of acquiring servicing rights from third parties to service mortgage
loans is capitalized and amortized in proportion to and over the period of the
estimated net servicing income. On December 31, 2002 and 2001, the Savings Bank
held $105,000 and $337,000 in PMSRs.
The balance of investment in limited partnership of $1.2 million and $3.7
million at December 31, 2002 and 2001 represents the Savings Bank's investment
in various divisions of a single limited partnership. The investment at December
31, 2002 and 2001 includes a $910,000 and a $3.0 million equity interest in a
limited partnership whose business activities are to purchase mortgage servicing
rights, and a $288,000 and a $751,000 investment in subordinated debentures of
the partnership. The debentures have an interest rate of 30%. During 2002 and
2001, the Company recorded $2.5 million and $1.1 million as a reserve against
its interest in the limited partnership and subordinate debentures due to the
impact of declines in interest rates and the adverse effect of increased loan
prepayment speeds on the value of PMSRs. In addition, a $5.0 million escrow
deposit of the PMSR servicer is maintained at the Savings Bank. The fair value
of this escrow is reflected in determining the value of the investment in
limited partnership. Based on a ruling from the OTS, the value of the escrow
deposit declined by $1.6 million, which is reflected as a component of the $2.5
million reserve recorded in 2002 against the investment in limited partnership.
In 1999, the Company reinvested the equity in one division into another
previously owned division. The single business activity of this limited
partnership is the purchase of current mortgage servicing rights. There are
several equity investors in each division of the partnership. The purchase of
the servicing rights is leveraged, allowing the partnership to purchase
additional servicing rights. At the end of five years, or at such time as the
investors agree, the servicing rights will be sold and the proceeds divided pro
rata among the investors. As with typical investments in PMSRs, the collateral
underlying the equity investment is the servicing rights. All purchases of
servicing rights must be approved by all equity investors. The administration
and servicing of the purchased portfolios in each division is performed by the
general partner.
SOURCES OF FUNDS AND BORROWINGS
Deposits decreased $176.1 million to $282.0 million at December 31, 2002, from
$458.1 million at December 31, 2001. The decrease consists primarily of a $104.6
million decrease in high yielding/costing brokered CDs and a $47.4 million
decrease in money market accounts. Of the $104.6 million decrease in brokered
CDs $55.7 million is attributable to the Savings Bank's effort not to renew
maturing brokered CDs yielding higher interest rates and the Savings Bank's
early redemption of $48.9 million of brokered CDs during September and December
2002. Deposits at December 31, 2002 include $248.6 million, or 88%, of deposits
attracted via the Savings Bank's Internet delivery channel, as compared to
$296.3 million, or 64.7%, at December 31, 2001. All deposits attracted via the
Internet are consumer deposits.
As discussed in the preceding "Business Plan" section, to achieve the desired
capital levels and profitability levels, the business plan of the Savings Bank
anticipates reduction of total assets to $250 million by March 31, 2003 to be
achieved through reduction of deposits by selling the Savings Bank's branch
deposits and operations, rate reductions and the early redemption of
27.
UMBRELLA BANCORP, INC.
brokered deposits. On January 31, 2003, the Savings Bank executed a Branch Sale
Agreement to sell its branch office in Chicago, Illinois with approximately $6.7
million in deposits. On January 24, 2003, the Savings Bank entered into a
separate Branch Purchase and Assumption Agreement to sell its other branch
office located in Dolton, Illinois with approximately $21.5 million in deposits.
Both contracts included the sale of leasehold improvements and furniture,
fixtures and equipment at the locations along with the assumption of the
buildings' lease obligations. The sale of the Chicago branch closed March 28,
2003 and the Dolton branch sale is expected to close April 26, 2003. During
2003, the Savings Bank anticipates recording a gain on the sales transactions of
$1.4 million, including recognition of the deferred gains on the branch
buildings sold in prior years.
Borrowings decreased by $6.0 million to $22.3 million at December 31, 2002, from
$28.3 million at December 31, 2001, primarily due to the repayment of $2.4
million in federal funds purchased, $2.2 million in notes payable and $1.7
million in margin account open lines using the proceeds from the sale of
securities available-for-sale and loans held for sale offset by an increase of
$300,000 in short term debt.
Although savings deposits are the primary source of funds for UmbrellaBank's
lending and investment activities and for its general business purposes, the
Savings Bank can also borrow funds from the FHLB. As a FHLB member, UmbrellaBank
is required to own capital stock in the FHLB and is authorized to apply for
advances on the security of such stock and certain of its home mortgages and
other assets (principally securities that are obligations of, or guaranteed by,
the United States Government or its agencies) provided certain standards related
to creditworthiness have been met. At December 31, 2002, UmbrellaBank had $12.8
million of fixed rate advances from the FHLB with interest rates ranging from
6.13% to 6.58% and a weighted rate of 6.48%.
As an alternative to accessing savings deposits and FHLB advances to fund
lending and investment activities, on November 28, 2001, UmbrellaBank issued and
sold $3.0 million of subordinated debentures in a pooled security offering which
included non-affiliated banks, savings institutions and their related holding
companies. The debentures have a maturity date of December 8, 2011, and the
coupon interest rate is adjustable and paid semi annually at 375 basis points
over the 180 day London Interbank Offered Rate ("LIBOR"), with a cap of 12%. The
debentures are subordinated to all other claims against the Savings Bank, are
not collateralized by the assets of UmbrellaBank, and can be purchased only by
"qualified institutional buyers" as defined by Rule 144A of the Securities Act
of 1934. 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. As of June 28, 2002 the OTS approved the
application. At December 31, 2002, $3.0 million of subordinated debentures were
outstanding, at a weighted rate of 5.78%.
In previous years, the employee stock ownership plan ("ESOP") borrowed funds
from the Bancorp in order to purchase shares for the ESOP. Effective September
30, 2002, the ESOP was terminated and the Bancorp accepted the unallocated
shares in full satisfaction of the loan balance of $289,000. The unallocated
shares were accounted for as a treasury stock transaction.
28.
UMBRELLA BANCORP, INC.
Subsequent to December 31, 2002, and in accordance with its capital and business
plans discussed in the preceding "Regulatory Compliance" and "Business Plan"
sections, the Company paid-off outstanding debt consisting of the following:
during January and February 2003 the Company paid-off the $2.0 million note
payable with the proceeds from the sale of an available-for-sale security and
capital contributions from the Company's two principal shareholders; on March
31, 2003, the Company paid-off the $4.3 million note payable with the proceeds
from capital contributions from the Company's two principal shareholders; and on
February 28, 2003, the Savings Bank paid-off the $2.8 million FHLB advance
incurring a penalty of $17,600 related to this transaction.
On February 27, 2003 the Company announced its intention to repurchase from time
to time in open market as well as privately negotiated transactions shares of
the Trust's 11% securities, which trade under the symbol "ATP_P" on the American
Stock Exchange. The present authorization does not impose any specific limit on
the number of Trust securities which may be purchased, and is being undertaken
in order to reduce debt and debt-like obligations as required by the capital
plan as discussed in the preceding "Regulatory Compliance" and "Business Plan"
sections. The continuing payment on the Trust securities is dependent on the
Company's continuing ability to make payments on the subordinated debenture it
issued to the Trust in connection with the 1998 public offering. In the absence
of prior written approval, the Savings Bank is currently precluded from making
dividend payments to the Company under mutual agreement with the OTS.
Consequently, no assurance can be made that the Company will continue to make
dividend payments on the Trust securities.
29.
UMBRELLA BANCORP, INC.
Deposit Flow. The following table sets forth the composition of and the change
in dollar amount of deposit accounts offered by UmbrellaBank between the dates
indicated.
December 31, 2002
-----------------------------------------
Percent
of Total Increase
Amount Deposits (Decrease)
-------- -------- ---------
Non-interest bearing accounts $ 5,835 2.1% $ 1,956
Savings accounts 13,127 4.7 5,775
NOW accounts 41,492 14.7 (569)
Money market accounts 96,512 34.2 (47,406)
-------- -------- ---------
Total 156,966 55.7 (40,244)
-------- -------- ---------
Certificate accounts:
1.00% to 2.99% 14,631 5.2 750
3.00% to 3.99% 29,623 10.5 (29,686)
4.00% to 4.99% 6,249 2.2 (39,080)
5.00% to 5.99% 11,699 4.1 (24,780)
6.00% to 6.99% 62,679 22.2 30,046
7.00% to 7.99% 200 .1 (83,106)
8.00% to 8.99% - - -
-------- -------- ---------
Total 125,081 44.3 (135,856)
-------- -------- ---------
Total deposits $282,047 100.0% $(176,100)
======== ======== =========
Weighted average rate 3.10%
========
December 31, 2001
-----------------------------------------
Percent
of Total Increase
Amount Deposits (Decrease)
-------- -------- ---------
(Dollars in thousands)
Non-interest bearing accounts $ 3,879 0.8% $ (5,865)
Savings accounts 7,352 1.6 2,061
NOW accounts 42,061 9.2 37,143
Money market accounts 143,918 31.4 74,883
-------- -------- ---------
Total 197,210 43.0 108,222
-------- -------- ---------
Certificate accounts:
1.00% to 2.99% 13,881 3.0 13,881
3.00% to 3.99% 59,309 13.0 59,309
4.00% to 4.99% 45,329 9.9 35,550
5.00% to 5.99% 26,479 5.8 (6,015)
6.00% to 6.99% 32,633 7.1 (75,236)
7.00% to 7.99% 83,306 18.2 (66,101)
8.00% to 8.99% - - -
-------- -------- ---------
Total 260,937 57.0 (38,612)
-------- -------- ---------
Total deposits $458,147 100.0% $ 69,610
======== ======== =========
Weighted average rate 4.46%
========
</Table>
December 31, 2000
------------------------------------------
Percent
of Total Increase
Amount Deposits (Decrease)
-------- -------- ---------
(Dollars in thousands)
Non-interest bearing accounts $ 9,744 2.5% $ 3,672
Savings accounts 5,291 1.4 (14,582)
NOW accounts 4,918 1.3 (5,694)
Money market accounts 69,035 17.7 64,609
-------- -------- ---------
Total 88,988 22.9 48,005
-------- -------- ---------
Certificate accounts:
1.00% to 2.99% - - -
3.00% to 3.99% - - -
4.00% to 4.99% 9,779 2.5 (38,113)
5.00% to 5.99% 32,494 8.4 (86,311)
6.00% to 6.99% 107,869 27.8 14,327
7.00% to 7.99% 149,407 38.4 148,964
8.00% to 8.99% - - (8)
-------- -------- ---------
Total 299,549 7.1 38,859
-------- -------- ---------
Total deposits $388,537 100.0% $ 86,864
======== ======== =========
Weighted average rate 6.48%
========
30.
UMBRELLA BANCORP, INC.
Certificate Accounts. The following table presents the amount of certificate
accounts outstanding at December 31, 2002, and the periods to maturity or
repricing.
Amount
------ Weighted
(In thousands) Average Rate
------------
Twelve months or less .......................... $ 61,525 4.50%
Thirteen months to 36 months ................... 46,694 5.83
Over 36 Months ................................. 16,862 4.90
--------
Total .......................................... $125,081 5.05%
========
At December 31, 2002, the Company had outstanding $39.3 million of certificate
of deposit accounts in amounts of $100,000 or more maturing or repricing as
follows:
Amount Weighted
------ Average Rate
(In thousands) ------------
Three months or less............................ $ 7,071 3.78%
Over three through six months................... 3,391 4.60
Over six less than 12 months.................... 9,406 5.43
12 months and over.............................. 19,478 6.03
----------
Total........................................... $ 39,346 5.36%
==========
The Company had pledged securities with principal balances totaling
approximately $2.8 million and $2.4 million at December 31, 2002 and 2001, as
collateral to secure certain public deposits.
Deposit Activity. The following table sets forth the deposit activities of the
Savings Bank for the years indicated.
Year Ended December 31,
------------------------------------------
2002 2001 2000
--------- ------- ---------
(In thousands)
Deposits in excess of withdrawals ...... $(193,338) $43,949 $ 181,360
Sale of branch deposits ................ - - (113,585)
Interest credited ...................... 17,238 25,661 19,089
--------- ------- ---------
Net increase (decrease) in deposits... $(176,100) $69,610 $ 86,864
========= ======= =========
31.
UMBRELLA BANCORP, INC.
The following table sets forth information regarding borrowings by the Company
on a consolidated basis at the end of and during the year indicated. The
borrowings at and during the year consisted of FHLB advances, junior
subordinated debt issued by the Company, subordinated debentures issued by the
Savings Bank, included in other borrowings, and notes payable. The weighted
average was computed on a monthly average basis.
At December 31,
------------------------------------------------
2002 2001 2000
---------- ---------- ----------
(Dollars in thousands)
Weighted average interest rate at end of year on:
FHLB advances ....................................... 6.48% 6.48% 6.49%
Junior Subordinated debt ............................ 11.00 11.00 11.00
Notes payable ....................................... 7.94 7.50 -
Other borrowings .................................... 5.78 4.04 8.92
Maximum amount of borrowings outstanding at any month end:
FHLB advances ....................................... $ 23,760 $ 26,760 $ 29,732
Junior Subordinated debt ............................ 17,160 16,603 17,250
Notes payable ....................................... 9,125 8,500 -
Other borrowings .................................... 49,711 6,545 5,930
Average borrowings outstanding with respect to:
FHLB advances ....................................... $ 15,072 $ 16,478 $ 19,611
Junior subordinated debt ............................ 16,986 16,795 17,180
Notes payable ....................................... 7,658 3,716 -
Other borrowings .................................... 18,967 2,709 6,162
---------- ---------- ----------
Total ............................................ $ 58,683 $ 39,698 $ 42,953
========== ========== ==========
Weighted average interest rate during the year paid on:
FHLB advances ....................................... 5.99% 6.13% 6.55%
Junior Subordinated debt ............................ 11.42 10.67 11.11
Notes payable ....................................... 7.42 6.13 -
Other borrowings .................................... 3.02 4.39 7.59
Total weighted average .......................... 6.76 9.49 8.52
32.
UMBRELLA BANCORP, INC.
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 2002 TO THE YEAR
ENDED DECEMBER 31, 2001
General: Net loss for the year ended December 31, 2002 was $12.3 million or
($7.17) per diluted share as compared to a net loss of $637,000 or ($.37) per
diluted share for 2001. The operating results were significantly impacted by the
$9.8 million provision for loan losses, the $2.5 million valuation allowance on
the investment in limited partnership related to the partnership's investment in
PMSRs, and the early redemption of $48.9 million of brokered deposits resulting
in additional interest expense of $1.0 million during the year.
Interest Income: Interest income decreased by $11.0 million, or 30%, to $26.1
million for the year ended December 31, 2002 from $37.1 million for last year.
The decline in interest income was primarily the result of a $29.8 million
decrease in average interest-earning assets to $430.0 million and a 224 basis
point decrease in the yield on interest-earning assets to 6.19% for the year
ended December 31, 2002 from 8.43% for 2001. As seen in the following table, and
as discussed previously, average balance declines were reflected in all
categories of interest earning assets.
Interest Expense: Interest expense decreased by $8.5 million, or 28.6%, to $21.0
million in 2002 from $29.5 million in 2001, as a result of a $55.1 million
decrease in average interest-bearing liabilities, and was additionally impacted
by a 116 basis point decrease in the average cost of interest-bearing
liabilities to 4.68% for the year ended 2002 from 5.84% for 2001. Excluding the
effect of the $1.0 million additional interest expense incurred during 2002
related to the early redemption of brokered deposits, 2002 interest expense
would have decreased $9.5 million and the average cost of interest-bearing
liabilities would have decreased 139 basis points.
As seen in the next table, the majority of the interest-bearing liability
shrinkage occurred in deposits, particularly CDs, including brokered CDs and
money market accounts, which were discussed previously.
Net Interest Income: Net interest income decreased by $2.6 million to $5.0
million for the year ended December 31, 2002 from $7.6 million during 2001. The
decrease in net interest income was the result of a 72 basis point decrease in
the net interest margin to 1.30% for the year ended December 31, 2002 from 2.02%
in 2001. The interest rate spread decreased by 108 basis points to 1.51% in 2002
from 2.59% in 2001.
33.
UMBRELLA BANCORP, INC.
The following table sets forth certain information relating to Umbrella
Bancorp's consolidated average balance sheets and reflects the average yield on
assets and average cost of liabilities for the continuing operations for the
years indicated. Such yields and costs are derived by dividing income or expense
by the average of assets or liabilities, respectively, for the periods
presented. Average balances are derived from daily averages for 2002 and 2001,
and from month-end balances for 2000. Management believes that the use of
month-end balances for 2000 instead of daily average balances has not caused a
material difference in the information presented.
2002
-----------------------------------------
Average
Average Yield/
Balance Interest Cost
-----------------------------------------
Assets
Interest-earning assets
Loans receivable (1) (5) $249,914 $ 17,434 6.98%
Interest-earning deposits 77,766 4,848 6.23
Securities (5) 102,725 4,368 4.25
-------- -------- -----
Total interest-earning assets 430,405 26,650 6.19%
Non-interest-earning assets (2) 45,745
--------
Total assets $476,150
========
Liabilities and stockholders' equity
Interest-bearing liabilities
Deposits $389,958 $ 16,994 4.36%
FHLB advances and other borrowings 42,851 2,102 4.91
Trust Preferred 16,995 1,940 11.42
-------- -------- -----
Total interest-bearing liabilities 449,804 21,036 4.68%
Non-interest-bearing liabilities 14,091
--------
Total liabilities 463,895
Equity 12,255
--------
Total liabilities and equity $476,150
========
Net interest income/interest rate spread (3) $ 5,614 1.51%
======== =====
Net interest-bearing liabilities/net interest margin (4) $ 19,399 1.30%
======== =====
Ratio of average interest-earning assets to average interest-
bearing liabilities 95.66x
========
2001
---------------------------------------
Average
Average Yield/
Balance Interest Cost
-------- -------- -------
Assets
Interest-earning assets
Loans receivable (1) (5) $301,117 $25,738 8.55%
Interest-earning deposits 62,236 4,418 7.10
Securities (5) 96,827 8,632 8.91
-------- ------- -----
Total interest-earning assets 460,180 38,788 8.43%
Non-interest-earning assets (2) 72,520
--------
Total assets $532,700
========
Liabilities and stockholders' equity
Interest-bearing liabilities
Deposits $465,171 $25,661 5.52%
FHLB advances and other borrowings 22,903 1,975 8.62
Trust Preferred 16,795 1,841 10.96
-------- ------- -----
Total interest-bearing liabilities 504,869 29,477 5.84%
Non-interest-bearing liabilities 6,584
--------
Total liabilities 511,453
Equity 21,247
--------
Total liabilities and equity $532,700
========
Net interest income/interest rate spread (3) $ 9,311 2.59%
======= =====
Net interest-bearing liabilities/net interest margin (4) $ 44,689 2.02%
======== =====
Ratio of average interest-earning assets to average interest-
bearing liabilities 91.15x
========
</Table>
<Table>
<Caption>
2000
------------------------------------
Average
Average Yield/
Balance Interest Cost
------------------------------------
Assets
Interest-earning assets
Loans receivable (1) (5) $280,777 $23,585 8.40%
Interest-earning deposits 36,666 3,161 8.62
Securities (5) 48,217 3,325 6.90
--------- ------- -----
Total interest-earning assets 365,660 30,071 8.22%
Non-interest-earning assets (2) 48,672
---------
Total assets $ 414,332
=========
Liabilities and stockholders' equity
Interest-bearing liabilities
Deposits $ 344,075 $19,089 5.55%
FHLB advances and other borrowings 25,773 1,753 6.80
Trust Preferred 17,180 1,971 11.47
--------- ------- -----
Total interest-bearing liabilities 387,028 22,813 5.89
Non-interest-bearing liabilities 6,609
---------
Total liabilities 393,637
Equity 20,695
---------
Total liabilities and equity $ 414,332
=========
Net interest income/interest rate spread (3) $ 7,258 2.33%
======= ====
Net interest-bearing liabilities/net interest margin (4) $ 21,368 1.98%
========= ====
Ratio of average interest-earning assets to average interest-
bearing liabilities 94.00x
=========
(1) Loans receivable include loans held for sale, portfolio loans receivable,
and discount loans receivable.
(2) Included in the balances are PMSRs of approximately $2.6 million,
$4.1 million, and $4.6 million, in 2002, 2001, and 2000, respectively.
(3) Interest rate spread represents the difference between the average yield on
total interest-earning assets and the average cost of total interest-earning
liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
(5) Tax exempt income is reflected on a fully tax equivalent basis utilizing a
34% rate.
34.
UMBRELLA BANCORP, INC.
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to: (1) changes in volume
(change in volume multiplied by prior rate); (2) changes in rates (change in
rate multiplied by prior volume); and (3) net changes in rate-volume. The change
attributable to the combined impact of volume and rate has been allocated
proportionately to the change due to volume and the change due to rate. Tax
exempt income is reflected on a fully tax equivalent basis utilizing a 34% rate.
2002 Compared to 2001 2001 Compared to 2000
----------------------------------- -------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
----------------------------------- -------------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In thousands)
Interest-earning assets:
Loans receivable, net $ (3,990) $ (4,314) $ (8,304) $ 1,733 $ 420 $ 2,153
Interest-earning deposits 1,012 (582) 430 1,894 (637) 1,257
Investment securities 497 (4,761) (4,264) 4,041 1,266 5,307
--------- --------- --------- --------- --------- --------
Total (2,481) (9,657) (12,138) 7,668 1,049 8,717
Interest-bearing liabilities:
Deposits (3,770) (4,897) (8,667) 6,681 (109) 6,572
FHLB advances and other
borrowings 1,224 (1,097) 127 (211) 433 222
Junior subordinated debt 99 - 99 (42) (88) (130)
--------- --------- --------- --------- --------- --------
Total (2,447) (5,994) (8,441) 6,428 236 6,664
--------- --------- --------- --------- --------- --------
Net change in interest income $ (34) $ (3,663) $ (3,697) $ 1,240 $ 813 $ 2,053
========= ========= ========= ========= ========= ========
Provision for Loan Losses: The Company recorded provision for loan losses of
$9.8 million and net charge-offs of $8.6 million for the year ended December 31,
2002 compared to $1.7 million and $1.2 million for 2001. At December 31, 2002,
the total allowance for loan losses was $4.1 million or 4.09% of total loans
receivable and 21.10% of total nonperforming loans, excluding discounted loans
and loans held for sale. The allowance for loan losses balance at December 31,
2001 was $3.0 million or 1.18% of loans receivable and 33.16% of total
nonperforming loans, excluding discounted loans and loans held for sale.
Factors considered by management in calculating a required allowance for loan
losses, and factors considered in providing for loan losses in 2002, were
discussed previously in the section titled "Analysis of Allowance for Loan
Losses."
Noninterest Income: Noninterest income (expense) decreased by $4.6 million to an
expense of $1.2 million for the year ended December 31, 2002 compared to income
of $3.4 million in 2001. This decrease was primarily the result of recording a
$2.5 million valuation allowance during 2002 as compared to $900,000 in 2001,
taken against the Company's interest in the limited partnership and resulting
from declines in interest rates and the negative adverse effect of increased
prepayment speeds on the value of PMSRs. In addition, during 2002 the Company
changed its accounting for the value of a $5.0 million escrow deposit of the
PMSR servicer associated with the PMSR based on a ruling from the OTS. The
decline in value of the escrow
35.
UMBRELLA BANCORP, INC.
deposit was $1.6 million. In addition, net losses on the sale of
available-for-sale securities were $502,000 in 2002 as compared to net gains of
$1.4 million in 2001 while net gains on trading securities was $33,000 in 2002
as compared to $1.2 million in 2001.
Noninterest Expense: Noninterest expense increased by $3.0 million to $15.4
million in 2002 from $12.4 million in 2001. The $3.0 million increase in
operating expenses was primarily the result of increases in: (i) professional
fees of approximately $1.0 million, consisting of legal, consulting and audit
related fees, and resulting, in part, from the Bancorp ROE and Savings Bank ROE
discussed in the preceding Regulatory Compliance section; (ii) data processing
expense of approximately $510,000 due to the Savings Bank's increased volume of
Internet transaction processing; (iii) compensation expense of approximately
$569,000 due to additional personnel being hired in the loan and internal audit
departments; (iv) federal deposit insurance premiums of $357,000 and (vi) an
increase in other expense of $926,000 consisting of increased REO real estate
taxes and loss provisions, increases in real estate taxes for corporate and
branch locations and increased amortization of tax credits. All of which were
offset by a $244,000 decline in occupancy expenses and a $367,000 decline in
outsourced servicing expense.
Income Tax Expense (Benefit): The Company recorded a tax benefit of $9.0 million
for 2002 compared to $2.4 million for 2001. The 2002 tax benefit is based on a
tax rate of approximately 39% calculated on the pre-tax loss of $21.3 million,
plus tax benefits derived from tax-exempt loans and securities, plus the
utilization of tax credits. The 2001 tax benefit resulted from increased
investments in tax-exempt loans and securities, the continued utilization of tax
credits and due to a net operating loss in 2001.
The deferred tax totaled $9.7 million as of December 31, 2002, including $95,000
related to available-for-sale securities. The remaining deferred tax asset
primarily consists of the tax effects of bad debt deductions, partnership
interests, FHLB stock dividends, the deferred gain on prior sales of facilities,
federal and state net operating loss carryforwards, and tax credit
carryforwards. Based on management's projections of future taxable income, no
valuation allowance is recorded against the deferred tax asset.
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 2001 TO THE YEAR
ENDED DECEMBER 31, 2000
General: Net loss for the year ended December 31, 2001 was $(637,000) or $(.37)
per diluted share. Net income for the year ended December 31, 2000 was $4.3
million, or $2.00 per diluted share, including the after tax gain of $5.7
million, or $2.71 per diluted share, on the sale of the Savings Bank's branch
deposits.
Interest Income: Interest income increased by $7.0 million, or 23.3%, to $37.1
million for the year ended December 31, 2001 from $30.1 million for last year.
The improvement in interest income was primarily the result of a $94.5 million
increase in average interest-earning assets to $460.1 million and a 21 basis
point increase in the yield on interest-earning assets to 8.43% for the year
ended December 31, 2001 from 8.22% for 2000. As seen in the preceding table, and
as discussed previously, average balance growth was achieved in all categories
of interest earning assets.
36.
UMBRELLA BANCORP, INC.
In addition to interest earned on loans and commitments for making loans, the
Savings Bank earns fees in connection with originating loans. Contractual fees
are received from the purchase/repurchase loan program and interest is charged
on outstanding balances. Net deferred fees or costs are amortized as yield
adjustments over the life of the related loans using the interest method,
adjusted for estimated prepayment based on the Savings Bank's historical
prepayment experience.
Interest Expense: Interest expense increased by $6.7 million, or 29.3%, to $29.4
million in 2001 from $22.8 million in 2000, as a result of a $117.8 million
increase in average interest-bearing liabilities, which was partially offset by
a 5 basis point decrease in the average cost of interest-bearing liabilities to
5.83% for the year ended 2001 from 5.88% for 2000.
As seen in the preceding table, the majority of the interest-bearing liability
growth occurred in deposits, particularly NOW and money market accounts, which
were discussed previously.
Net Interest Income: Net interest income increased by $340,000 to $7.7 million
for the twelve months ended December 31, 2001 from $7.3 million for last year.
The increase in net interest income was the result of a 4 basis point increase
in the net interest margin to 2.04% for the year ended December 31, 2001 from
2.00% in 2000. The interest rate spread increased by 24 basis points to 2.59% in
2001 from 2.35% in 2000.
Provision for Loan Losses: The Company recorded provision for loan losses of
$1.7 million for the year ended December 31, 2001 compared to $1.2 million for
2000, resulting in total allowances for loan losses of $3.0 million, or .93%, of
total loans receivables and 33.16% of total nonperforming loans at December 31,
2001. The allowance for loan losses balance at December 31, 2000 was $2.4
million, or .87% of loans receivable, excluding discounted loans receivable. At
December 31, 2001, the Savings Bank experienced an increase in the percentage of
net loans 90 days or more delinquent from 1.59% of total loans receivable and
loans held for sale at December 31, 2000 to 2.82% of total loans receivable and
loans held for sale at December 31, 2001. The increase was primarily due to
classification activities relating to certain single-family residential mortgage
loans underlying purchase repurchase loan program, which were discovered to
involve various irregularities including broker and originator fraud issues, as
well as payment and loan servicing defaults. Also, total purchase repurchase
loans outstanding at December 31, 2001 were $65.1 million, compared to $38.0
million at December 31, 2000 and the commercial multi-family secured real estate
and commercial loan balances totaled $113.7 million at December 31, 2001
compared to $65.2 million at December 31, 2000.
Based upon these factors, management increased the allowance for loan losses
during the fourth quarter of 2001. Approximately $800,000 was established to
cover the purchase repurchase loan program and $300,000 allocated to cover
commercial loan assets, including real estate secured construction loans. In
addition, Umbrella Bancorp recorded a $500,000 provision for loan losses in the
fourth quarter of 2001 related to loans acquired from the Savings Bank.
37.
UMBRELLA BANCORP, INC.
Noninterest Income: Noninterest income decreased by $6.7 million to $3.4 million
for the year ended December 31, 2001 compared to $10.1 million in 2000. This
decrease was primarily the result of the $7.9 million pretax gain on the sale of
deposits from three of the Savings Bank's branches in 2000. The purchaser of the
branches also assumed the lease contracts on those buildings, which resulted in
an additional gain of $591,000 during 2000 from the previously deferred profit
on the 1999 sale of two of those branch buildings. 2001 was also negatively
impacted by a $(899,000) loss on an investment in a limited partnership due to
writing down the value of mortgage servicing rights within the partnership.
These decreases were partially offset by gains on sales of securities, which
increased from net losses of $(111,000) in 2000 to net gains of $1.4 million in
2001 and trading account gains, which increased to $1.2 million in 2001 from
$214,000 in 2000.
There were no other components of noninterest income that changed substantially
between 2000 and 2001.
Noninterest Expense: Noninterest expense increased by $1.8 million to $12.4
million in 2001 from $10.6 million in 2000. The increase is primarily due to a
$453,000 increase in professional fees, which increased due to outsourcing of
internal audit and loan review services and legal fees associated with the
fraudulent loan activity previously discussed, a $328,000 increase in data
processing due to costs of converting to a new data processing system and an
increase in Internet banking customers, and a $945,000 increase in outsourced
servicing due to increased consumer loan and deposit volumes managed by
outsourced deposit operations, credit card operations, and call center servicing
facilities.
Income Tax Expense (Benefit): The Company recorded a tax benefit of $2.4 million
for 2001 compared to tax expense of $1.2 million for 2000. The 2001 tax benefit
resulted from increased investments in tax-exempt loans and securities, the
continued utilization of tax credits and due to a net operating loss in 2001.
The 2000 tax expense was attributable to taxes on the deposit sale, partially
offset by $360,000 of low-income housing tax credits.
LIQUIDITY AND CAPITAL RESOURCES
The Company'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, borrowed money;
FHLB advances; and loan and security sales. The most liquid assets are cash and
short-term investments. The levels of these assets are dependent on operating,
financing, and investing activities during any given period. Cash and
interest-earning deposits totaled $71.9 million at December 31, 2002. The
Company has adequate alternative funding sources if short-term liquidity needs
arise.
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 the Savings Bank is both a daily and long-term function
of the Savings Bank's senior management. Management meets regularly to monitor
interest rates,
38.
UMBRELLA BANCORP, INC.
current and projected commitments to originate/purchase/sell loans and the
likelihood of funding such commitments, monitor deposit flows and projected cash
flows. Excess funds are generally invested in short-term investments. Cash flow
projections are updated regularly to assure necessary liquidity.
At December 31, 2002, the Savings Bank's capital exceeded all capital
requirements of the OTS. The Savings Bank's Tier I capital to adjusted assets,
Tier I capital to risk-weighted assets, and risk-based capital ratios were
5.76%, 10.70%, and 13.61%, respectively.
On September 29, 2002, the Board of Directors of the Bancorp authorized the
issuance of up to 10,000 shares of Series A 8.0% Perpetual Preferred Convertible
Preferred Stock ("Series A Stock"). The Series A Stock has a par and face value
of $1,000. After March 31, 2003, the holders of record of the Series A Stock on
the dates specified below shall be entitled to receive, as and when declared by
the Board of Directors and out of assets of the Bancorp which are by law
available for payment of dividends, cumulative preferential cash dividends, at
the rate of $80.00 per share per annum, payable quarterly on the first day of
July, October, January and April in each year. Dividends on the Series A Stock
shall be cumulative, whether or not in any dividend period or periods after
March 31, 2003 there shall be surplus or net profits of the Company legally
available for the payment of such dividends. Dividends on the Series A Stock
shall be junior and subordinate to the payment of the Bancorp's obligations for
dividends or payments under the Company's 11% Junior Subordinate Deferrable
Interest Debentures. After March 31, 2004, the Bancorp, at the option of the
Board of Directors, may at any time or from time to time redeem the whole or any
part of the Series A Stock by paying therefore in cash $1,000 per share plus an
amount equal to all dividends thereon declared but unpaid on the date fixed for
redemption (the "Redemption Price"). Until March 31, 2008, each holder of Series
A Stock may at any time upon surrender of the certificates therefore, convert
any or all of such holder's Series A Stock into fully paid and nonassessable
shares of Common Stock of the Bancorp, at the rate of 166 shares of Common Stock
for each share of Series A Stock so surrendered for conversion.
For the period September 30, 2002 to December 31, 2002 the Company received from
its two principal shareholders cash contributions totaling $2,075,000 for 1,921
shares of Series A Preferred Stock ($1,921,000), 18,000 shares of common stock
($59,000) related to the exercise of stock options and $95,000 for
available-for-sale securities at the higher of fair market value or amortized
cost.
For the period January 1, 2003 to March 31, 2003 the Company received from three
of its principal shareholders cash contributions totaling $7,547,000 for 6,064
shares of Series A Stock ($6,064,000), 118,134 shares of common stock ($447,000)
related to the exercise of stock options, and $1,036,000 for available-for-sale
securities at the higher of fair market value or amortized cost.
At December 31, 2002, the Savings Bank had funding commitments relating to
loans, lines of credit and letters of credit totaling $11.9 million. The Savings
Bank has Community Reinvestment Act investment commitments outstanding of $1.5
million. These commitments include $1.2 million to be funded over nine years for
the investment in the Chicago Equity Fund, $216,000 to be funded over five years
for investment in the Community Investment Corporation, and $51,000 to be funded
over two years for investment in the Kedzie Limited Partnership. On March 31,
2003, the Savings Bank funded its outstanding commitments to the
39.
UMBRELLA BANCORP, INC.
Chicago Equity Fund and Community Investment Corporation of $1.2 million and
$216,000, respectively.
Also as of December 31, 2002 the Savings Bank had commitments to purchase
available-for-sale securities of $22.4 million.
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.
On April 1, 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 is effective for financial statements issued on or
after May 15, 2002. SFAS 145 requires that any gains or losses on extinguishment
of debt that were classified as an extraordinary item in prior periods that are
not unusual in nature and infrequent in occurrence be reclassified to other
income or expense. SFAS No. 145 also amends SFAS No. 13 to require certain
modifications to capital leases be treated as a sale-leaseback and modifies the
accounting for sub-leases when the original lessee remains a secondary obligor
or guarantor. Adoption of SFAS No. 145 resulted in the Company recording $1.o
million of additional interest expense on deposits in the statement
40.
UMBRELLA BANCORP, INC.
of operations. The additional interest expense was the result of an early
redemption of brokered CDs. Prior to the adoption of this pronouncement, the
expense would have been recorded as an extraordinary event.
On June 1, 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002, and may be early applied.
SFAS No. 146 supersedes EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". SFAS No. 146 provides guidance on the
accounting for the recognition of liabilities associated with exit and disposal
activities. Under SFAS No. 146, "a liability for a cost associated with an exit
or disposal activity should be recognized when the liability is incurred." The
FASB concluded that an entity's commitment to a plan, by itself, does not create
a present obligation to others that meet the definition of a liability. The
Company has adopted SFAS No. 146 effective July 1, 2002 and the adoption of this
standard did not have a material effect on the Company's consolidated financial
position or results of operations. However as the Company exits certain business
activities and reduces personnel it is anticipated the Company will recognize
liabilities in accordance with SFAS No. 146.
On October 1, 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 is effective October 1, 2002, and may be
early applied. SFAS No. 147 supersedes SFAS No. 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions." SFAS No. 147 provides guidance
on the accounting for the acquisition of a financial institution, and applies to
all such acquisitions except those between two or more mutual enterprises. Under
SFAS No. 147, the excess of the fair value of liabilities assumed over the fair
value of tangible and identifiable intangible assets acquired in a financial
institution business combination represents goodwill that should be accounted
for under SFAS No. 142, "Goodwill and Other Intangible Assets." If certain
criteria are met, the amount of the unidentifiable intangible asset resulting
from prior financial institutions acquisitions is to be reclassified to goodwill
upon adoption of this Statement. Financial institutions meeting conditions
outlined in SFAS No. 147 are required to restate previously issued financial
statements. The objective of the restatement is to present the balance sheet and
income statement as if the amount accounted for under SFAS No. 72 as an
unidentifiable intangible asset had been reclassified to goodwill as of the date
the Company adopted SFAS No. 142. Adoption of SFAS No. 147 on October 1, 2002
did not have a material effect on the Company's financial statements at that
date as the Company had not previously acquired any financial institution
branches.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure". SFAS No. 148 is effective for the
2002 annual financial statements as well as interim financial statements
starting in the first quarter of 2003. SFAS No. 148 requires more prominent
disclosure of how an entity's accounting policy for stock based compensation
affects net income, including moving the pro-forma table of the effect of not
following FAS 123 to Note 1 Summary of Significant Accounting policies. SFAS No.
148 also provides additional choices on how to adopt FAS 123.
41.
UMBRELLA BANCORP, INC.
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 repricing 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 on 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 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.
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. The Savings Bank, from time to
time, also invests in long-term, fixed-rate mortgages provided it is compensated
with an acceptable spread. None of these strategies are prohibited or otherwise
restricted by the Savings Bank ROE discussed previously.
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 the market value of assets and the market value of liabilities, adjusted
for the value of off-balance-sheet items. The following table presents the
Savings Bank's projected change in NPV for the various rate shocks as of
December 31, 2002 and 2001:
42.
UMBRELLA BANCORP, INC.
Estimated Increase
(Decrease) in NPV
Change in Estimated -----------------
Interest Rate NPV Amount Percent
------------- --- ------ -------
(Dollars in thousands)
2002
300 basis point rise $ 24,780 $ (4,282) (15)%
200 basis point rise 26,252 (2,810) (10)
100 basis point rise 27,794 (1,268) (4)
Base scenario 29,062 - -
100 basis point decline 30,188 1,126 4
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, 2002 and 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 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. In
addition, as the Company executes its business plan to reduce assets and
liabilities and restructure its balance sheet the Company could experience
significant changes in NPV at various points in time during 2003 and the
Investment Committee would likely be changing strategies to address these
changes.
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.
43.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Umbrella Bancorp, Inc.
Summit, Illinois
We have audited the accompanying consolidated statements of financial condition
of Umbrella Bancorp, Inc. and Subsidiaries (the Company) as of December 31, 2002
and 2001, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Umbrella Bancorp,
Inc. and Subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
Crowe Chizek and Company LLC
Oak Brook, Illinois
March 31, 2003
44.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 2002 and 2001
(Dollars in thousands)
2002 2001
----------- -----------
ASSETS
Cash $ 2,089 $ 647
Interest-earning deposits 69,811 37,002
----------- -----------
Total cash and cash equivalents 71,900 37,649
Trading securities - 6,053
Securities available-for-sale 105,613 123,118
Securities held-to-maturity - 1,859
Loans held for sale 20,428 65,056
Loans receivable, net 96,024 250,353
Mortgage loan servicing rights 105 337
Investment in limited partnership 1,198 3,743
Stock in Federal Home Loan Bank of Chicago 2,947 2,800
Foreclosed real estate, net 2,361 730
Premises and equipment, held for sale 5,401 -
Premises and equipment, net 13,476 20,609
Debt issuance costs, net 1,757 1,831
Accrued interest receivable 1,861 5,272
Receivable from loan servicers 2,480 4,479
Deferred tax assets 9,679 2,214
Prepaid expenses and other assets 8,707 10,532
----------- -----------
Total assets $ 343,937 $ 536,635
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 282,047 $ 458,147
Borrowed money 22,305 28,343
Custodial escrow balances for loans serviced for others 7,423 9,499
Accrued interest payable 1,232 1,707
Other liabilities 5,627 4,759
Junior subordinated debt 17,123 16,603
Stockholders' equity
Preferred stock 3 3
Preferred stock, Series A 1,921 -
Common stock 21 21
Additional paid-in capital 9,284 9,214
Retained earnings - substantially restricted 2,620 15,181
Treasury stock - common, at cost (5,261) (5,121)
Employee Stock Ownership Plan loan - (341)
Unearned stock awards (248) (248)
Accumulated other comprehensive loss (160) (1,132)
----------- -----------
Total stockholders' equity 8,180 17,577
----------- -----------
Total liabilities and stockholders' equity $ 343,937 $ 536,635
=========== ===========
See accompanying notes to consolidated financial statements.
45.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands, except per share data)
2002 2001 2000
-------- -------- --------
INTEREST INCOME
Loans receivable $ 17,046 $ 24,268 $ 23,585
Securities 4,172 8,389 3,325
Interest-earning deposits 4,848 4,418 3,161
-------- -------- --------
Total interest income 26,066 37,075 30,071
INTEREST EXPENSE
Deposits 16,994 25,661 19,089
Borrowed money 2,102 1,975 1,753
Junior subordinated debt 1,940 1,841 1,971
-------- -------- --------
Total interest expense 21,036 29,477 22,813
-------- -------- --------
NET INTEREST INCOME 5,030 7,598 7,258
Provision for loan losses 9,807 1,710 1,218
-------- -------- --------
NET INTEREST INCOME (LOSS) AFTER PROVISION FOR LOAN LOSSES (4,777) 5,888 6,040
NONINTEREST INCOME
Loan servicing income 244 300 109
Net gain (loss) on sale of
Loans held for sale 223 19 107
Foreclosed real estate 2 53 (18)
Securities available-for-sale (502) 1,411 (111)
Profits on trading account activity 33 1,221 214
Branch deposits - - 7,974
Branch facilities 127 116 719
Fees and service charges 955 1,079 1,013
Net loss on investment in limited partnership (2,550) (899) (107)
Other 269 95 191
-------- -------- --------
Total noninterest income (loss) (1,199) 3,395 10,091
(Continued)
46.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands, except per share data)
2002 2001 2000
-------- -------- -------
NONINTEREST EXPENSE
Compensation and benefits $ 4,220 $ 3,651 $ 3,377
Occupancy and equipment 2,043 2,287 2,154
Federal deposit insurance premiums 438 81 62
Loan servicing expense 890 582 722
Professional fees 2,111 1,103 650
Advertising and promotion 244 316 438
Data processing 1,635 1,125 797
Outsourced servicing expense 984 1,351 406
Other 2,791 1,865 1,967
-------- -------- -------
Total noninterest expense 15,356 12,361 10,573
-------- -------- -------
Income (loss) before income taxes (21,332) (3,078) 5,558
Income tax expense (benefit) (9,035) (2,441) 1,227
-------- -------- -------
NET INCOME (LOSS) $(12,297) $ (637) $ 4,331
======== ======== =======
Net income (loss) per share
Basic $ (7.17) $ (.37) $ 2.16
Diluted (7.17) (.37) 2.00
See accompanying notes to consolidated financial statements.
47.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands, except per share data)
Preferred Additional
Preferred Stock, Common Paid-in Retained
Stock Series A Stock Capital Earnings
--------- --------- ------ ---------- --------
Balance at January 1, 2000 $ 3 $ - $ 20 $ 8,829 $ 12,260
Comprehensive income:
Net income - - - - 4,331
Other comprehensive income - - - - -
Total comprehensive income
ESOP compensation - - - - -
Proceeds from exercise of stock options - - - 64 -
Cash dividends ($.20 per share) - - - - (402)
--------- --------- ------ ---------- --------
Balance at December 31, 2000 3 - 20 8,893 16,189
Comprehensive loss:
Net loss - - - - (637)
Other comprehensive loss - - - - -
Total comprehensive loss
ESOP compensation - - - - -
Purchase of 365,796 shares of treasury stock - - - - -
Proceeds from exercise of stock options - - 1 250 -
Tax benefit of stock options exercised - - - 71 -
Cash dividends ($.20 per share) - - - - (371)
--------- --------- ------ ---------- --------
Balance at December 31, 2001 3 - 21 9,214 15,181
Comprehensive loss:
Net loss - - - - (12,297)
Other comprehensive income - - - - -
Total comprehensive loss
ESOP termination - - - (142) -
ESOP compensation - - - - -
Proceeds from exercise of stock options - - - 183 -
Tax benefit of stock options exercised - - - 29 -
Cash dividends ($.15 per share) - - - - (264)
Issuance of Series A preferred stock - 1,921 - - -
--------- --------- ------ ---------- --------
Balance at December 31, 2002 $ 3 $ 1,921 $ 21 $ 9,284 $ 2,620
========= ========= ====== ========== ========
Accumulated Total
Treasury Unearned Other
Stock - ESOP Stock Comprehensive Stockholders'
Common Loan Awards Income (Loss) Equity
-------- ----- ----------- ---------- -------------
Balance at January 1, 2000 $ - $(426) $ (248) $ (850) $ 19,588
Comprehensive income:
Net income - - - - 4,331
Other comprehensive income - - - 172 172
--------
Total comprehensive income 4,503
ESOP compensation - 21 - - 21
Proceeds from exercise of stock options - - - - 64
Cash dividends ($.20 per share) - - - - (402)
-------- ----- ----------- ---------- --------
Balance at December 31, 2000 - (405) (248) (678) 23,774
Comprehensive loss:
Net loss - - - - (637)
Other comprehensive loss - - - (454) (454)
--------
Total comprehensive loss (1,091)
ESOP compensation - 64 - - 64
Purchase of 365,796 shares of treasury stock (5,121) - - - (5,121)
Proceeds from exercise of stock options - - - - 251
Tax benefit of stock options exercised - - - - 71
Cash dividends ($.20 per share) - - - - (371)
-------- ----- ----------- ---------- --------
Balance at December 31, 2001 (5,121) (341) (248) (1,132) 17,577
Comprehensive loss:
Net loss - - - - (12,297)
Other comprehensive income - - - 972 972
--------
Total comprehensive loss (11,325)
ESOP termination (140) 282 - - -
ESOP compensation - 59 - - 59
Proceeds from exercise of stock options - - - - 183
Tax benefit of stock options exercised - - - - 29
Cash dividends ($.15 per share) - - - - (264)
Issuance of Series A preferred stock - - - - 1,921
-------- ----- ----------- ---------- --------
Balance at December 31, 2002 $ (5,261) $ - $ (248) $ (160) $ 8,180
======== ===== =========== ========== ========
See accompanying notes to consolidated financial statements.
48.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands)
2002 2001 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (12,297) $ (637) $ 4,331
Adjustments to reconcile income (loss)
to net cash from operating activities
Depreciation and amortization 3,506 2,441 2,388
Accretion of discounts and deferred loan fees (1,095) 55 (64)
Deferred income tax expense (benefit) (8,063) (655) 981
Provision for losses on loans receivable 9,807 1,710 1,218
Loss (gain) on sale of
Loans held for sale (223) (19) (107)
Securities available-for-sale 502 (1,411) 111
Trading account securities (33) (1,221) (214)
Foreclosed real estate (2) (53) 18
Branch facilities (127) (116) (719)
Branch deposits - - (7,974)
Federal Home Loan Bank of Chicago stock dividend (147) (185) (134)
Net change in trading account activity 5,208 (3,733) (217)
Net change in investment in limited partnership 2,545 644 107
Loans originated and purchased for sale, net 118,512 (26,138) (20,005)
Amortization of purchased loan servicing rights 232 60 67
Net change in debt issuance costs 74 (57) 64
ESOP compensation 59 64 21
Change in accrued interest receivable and prepaid 5,265 (1,796) (4,107)
Change in accrued interest payable and other liabilities 520 (383) 1,039
--------- ---------- -----------
Net cash provided by (used in) operating activities 124,243 (31,430) (23,196)
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans receivable 69,795 (10,562) 7,237
Proceeds from maturities of and principal repayments on
Securities available-for-sale 7,710 21,117 180
Securities held-to-maturity 1,859 24,664 138
Proceeds from sale of (payment for)
Securities available-for-sale 157,589 126,838 1,144
Foreclosed real estate 2,531 3,452 2,422
Branch deposits, including cash and cash equivalents - - (106,085)
Purchase of
Securities available-for-sale (145,848) (255,817) (1,368)
Securities held-to-maturity - - (802)
Premises and equipment (1,774) 13,227 (3,697)
Stock in Federal Home Loan Bank of Chicago - - (178)
Payment received on GFS preferred stock - 3,600 600
Cash paid to former stockholders of On-Line - (157) (203)
--------- ---------- -----------
Net cash provided by (used in) investing activities 91,862 (100,092) (100,612)
(Continued)
49.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands)
2002 2001 2000
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ (176,100) $ 69,610 $ 200,795
Proceeds from borrowed money 298,425 40,138 472
Repayment of borrowed money (304,463) (30,503) (22,100)
Reissuance of junior subordinated debentures 1,385 654 -
Repurchase of junior subordinated debentures (865) (638) (663)
Proceeds from issuance of preferred stock, Series A 1,921 - -
Purchase of treasury stock - (5,121) -
Proceeds from exercise of stock options 183 251 64
Dividends paid (264) (371) (402)
Net change in custodial balances for loans serviced (2,076) 1,134 1,987
---------- ---------- -----------
Net cash provided by (used in) financing activities (181,854) 75,154 180,153
---------- ---------- -----------
Net change in cash and cash equivalents 34,251 (56,368) 56,345
Cash and cash equivalents at beginning of year 37,649 94,017 37,672
---------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 71,900 $ 37,649 $ 94,017
========== ========== ===========
Supplemental disclosures of cash flow information
Cash paid (refunded) during the year for
Interest $ 21,511 $ 30,588 $ 21,560
Income taxes (1,104) 1,800 900
Supplemental disclosure of noncash investing and
financing activities
Sale of branch deposits
Assets sold $ - $ - $ 474
Cash paid - - 106,085
---------- ---------- -----------
Net liabilities sold $ - $ - $ 105,611
========== ========== ===========
Transfer of loans to foreclosed real estate $ 4,160 $ 1,631 2,658
Amount receivable from loan servicer 2,480 4,437 3,162
Transfer of trading securities to available for sale 878 - -
Transfer of unallocated ESOP shares to treasury stock 282 - -
Transfer of loans receivable to loans held for sale 73,661 - -
See accompanying notes to consolidated financial statements.
50.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: The consolidated financial
statements include Umbrella Bancorp, Inc. ("the Company" or "the Bancorp") and
its wholly owned subsidiaries, UmbrellaBank, FSB (the "Savings Bank" or
"UmbrellaBank") and Argo Redemption Corporation ("Argo Redemption"); and the
Savings Bank's wholly owned subsidiary, Dolton-Riverdale Service Corporation
("Dolton Service"). Intercompany transactions and balances are eliminated in
consolidation.
The Company, through its subsidiaries, provides a full range of financial
services through its branch locations in Cook County, Illinois and its Internet
website. The Savings Bank's primary business is the solicitation of deposits
from the general public and the purchase or origination of loans secured by
one-to-four-family residential real estate. In addition, the Savings Bank sells
mortgage loans on a service-released basis into the secondary market, has an ATM
network, and has investments in a partnership which owns purchased mortgage
servicing rights.
During July 2000, the Savings Bank established an Internet banking platform,
4hich is accessible via the Internet at http://www.umbrellabank.com and allows
consumers to conduct online financial transactions, including but not limited to
opening account relationships, transferring funds, accessing account
information, processing bill payments, and applying for or obtaining loan
products, including but not limited to credit cards and residential mortgage
secured loans. The Savings Bank expensed $626,000 during the year ended December
31, 2000 related to organizational expenses of umbrellabank.com, which are
classified with other expense in the consolidated statements of operations.
Use of Estimates: To prepare financial statements in conformity with accounting
principles generally accepted in the United States of America, management makes
estimates and assumptions based on available information. These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided, and future results could differ. The allowance for loan
losses, fair values of financial instruments, amortization period of debt
issuance costs, valuation of the limited partnership investment, and valuation
of assets held for sale are particularly subject to change.
Securities: Securities are classified as held-to-maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available-for-sale when they might be
sold before maturity. Securities available-for-sale are carried at fair value,
with unrealized holding gains and losses, net of taxes, reported in other
comprehensive income. Trading securities are carried at fair value, with changes
in unrealized holding gains and losses included in income. Other securities such
as Federal Home Loan Bank stock are carried at cost.
(Continued)
51.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. Securities
are written down to fair value when a decline in fair value is not temporary.
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by the issuers of the
securities.
Loans: Loans are reported at the principal balance outstanding, net of
unearned discounts, deferred loan fees and
costs, and an allowance for loan losses.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term. Interest income is not
reported when full loan repayment is in doubt, typically when the loan is
impaired or payments are past due over 90 days. Payments received on such loans
are reported as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable credit losses, increased by the provision for loan losses
and decreased by charge-offs less recoveries. Management estimates the allowance
balance required using past loan loss experience, known and inherent risks in
the nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other
factors. Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in management's judgment,
should be charged-off.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, and credit card loans and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral.
Loans Held for Sale: Loans held for sale in the secondary market are carried at
the lower of cost or estimated market value in the aggregate. Loans transferred
to held for sale are transferred at the lower of cost or market.
Foreclosed Real Estate: Foreclosed real estate acquired through or instead of
loan foreclosure is initially recorded at fair value when acquired, establishing
a new cost basis. If fair value declines, a valuation allowance is recorded
through expense. Costs after acquisition are expensed.
(Continued)
52.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Premises and equipment are depreciated using the
straight-line method with useful lives ranging from 3 to 7 years.
Premises and Equipment, Held for Sale: Premises and equipment, held for sale are
carried at the lower of amortized cost or market value. Depreciation is
discontinued when the assets are classified as held for sale.
Investment in Limited Partnership: The investment in limited partnership is
carried at the lower of fair value or the equity investment. The cost of
acquiring the rights to service mortgage loans is capitalized at the partnership
level as are other loan servicing costs. An independent valuation is performed
quarterly by the partnership.
Servicing Rights: The Company does not service loans sold. Purchased servicing
rights are recognized as assets and expensed in proportion to, and over the
period of, estimated net servicing revenues. Impairment is evaluated based on
the fair value of the rights, using groupings of the underlying loans as to
interest rates and then, secondarily, as to geographic and prepayment
characteristics. Any impairment of a grouping is reported as a valuation
allowance.
Income Taxes: Income tax expense (benefit) is the total of the current year
income tax due or refundable and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are the expected future tax
amounts for the temporary differences between carrying amounts and tax bases of
assets and liabilities, computed using enacted tax rates. A valuation allowance,
if needed, reduces deferred tax assets to the amount expected to be realized.
Cash and Cash Equivalents: Cash and interest-earning deposits with banks with
original maturities less than 90 days are considered to be cash and cash
equivalents. The Company reports net cash flows for customer loan and deposit
activity.
Earnings (Loss) Per Share: Basic earnings (loss) per share is calculated by
dividing net income (loss) by the weighted average number of common shares
outstanding. Diluted earnings (loss) per share is calculated by dividing net
income (loss) by the weighted average number of shares, adjusted for the
dilutive effects of outstanding stock options and the management retention plan,
to the extent they are dilutive. Options and other potentially dilutive
securities are excluded if they are anti-dilutive.
Comprehensive Income (Loss): Comprehensive income (loss) consists of net income
(loss) and other comprehensive income (loss). Other comprehensive income (loss)
includes unrealized gains and losses on securities available-for-sale, net of
tax, which are also recognized as a separate component of equity.
(Continued)
53.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Industry Segments: While the Company's chief decision-makers monitor the revenue
streams of various Company products and services, the identifiable segments are
not material and operations are managed and financial performance is evaluated
on a Company-wide basis. Accordingly, all of the Company's financial service
operations are considered by management to be aggregated in one reportable
operating segment. Prior to 2001, internal financial information was primarily
reported and aggregated into two lines of business: banking and discount loan
operations.
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate Note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
New Accounting Pronouncements: 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.
(Continued)
54.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. The impact on
assets held for sale does not have a material effect on the consolidated
financial statements as the estimated fair values exceed book values.
On April 1, 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 is effective for financial statements issued on or
after May 15, 2002. SFAS 145 requires that any gains or losses on extinguishment
of debt that were classified as an extraordinary item in prior periods that are
not unusual in nature and infrequent in occurrence be reclassified to other
income or expense. SFAS No. 145 also amends SFAS No. 13 to require certain
modifications to capital leases be treated as a sale-leaseback and modifies the
accounting for sub-leases when the original lessee remains a secondary obligor
or guarantor. Adoption of SFAS No. 145 resulted in the Company recording $1.0
million of additional interest expense on deposits in the statement of
operations. The additional interest expense was the result of an early
redemption of brokered CDs. Prior to the adoption of this pronouncement, the
expense would have been recorded as an extraordinary event.
On June 1, 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002, and may be early applied.
SFAS No. 146 supersedes EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 provides guidance on the
accounting for the recognition of liabilities associated with exit and disposal
activities. Under SFAS No. 146, "a liability for a cost associated with an exit
or disposal activity should be recognized when the liability is incurred." The
FASB concluded that an entity's commitment to a plan, by itself, does not create
a present obligation to others that meet the definition of a liability. The
Company has adopted SFAS No. 146 effective July 1, 2002 and the adoption of this
standard did not have a material effect on the Company's consolidated financial
position or results of operations. However, as the Company exits certain
business activities and reduces personnel it is anticipated the Company will
recognize liabilities in accordance with SFAS No. 146.
(Continued)
55.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
On October 1, 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 was effective October 1, 2002, and may be
early applied. SFAS No. 147 supersedes SFAS No. 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions." SFAS No. 147 provides guidance
on the accounting for the acquisition of a financial institution, and applies to
all such acquisitions except those between two or more mutual enterprises. Under
SFAS No. 147, the excess of the fair value of liabilities assumed over the fair
value of tangible and identifiable intangible assets acquired in a financial
institution business combination represents goodwill that should be accounted
for under SFAS No. 142, "Goodwill and Other Intangible Assets." If certain
criteria are met, the amount of the unidentifiable intangible asset resulting
from prior financial institutions acquisitions is to be reclassified to goodwill
upon adoption of this Statement. Financial institutions meeting conditions
outlined in SFAS No. 147 are required to restate previously issued financial
statements. The objective of the restatement is to present the balance sheet and
income statement as if the amount accounted for under SFAS No. 72 as an
unidentifiable intangible asset had been reclassified to goodwill as of the date
the Company adopted SFAS No. 142. Adoption of SFAS No. 147 on October 1, 2002
did not have any impact on the Company's financial statements at that date as
the Company had not previously acquired any financial institution branches.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure." SFAS No. 148 is effective for the
2002 annual financial statements as well as interim financial statements
starting in the first quarter of 2003. SFAS No. 148 requires more prominent
disclosure of how an entity's accounting policy for stock based compensation
affects net income, including moving the pro-forma table of the effect of not
following FAS 123 to Note 1 Summary of Significant Accounting policies. SFAS No.
148 also provides additional choices on how to adopt FAS 123.
Stock Compensation: The Company applies APB Opinion No. 25 in accounting for the
stock option plans and, accordingly, compensation cost based on the fair value
at grant date has not been recognized for its stock options in the consolidated
financial statements. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options under SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net income (loss) from
continuing operations would have been reduced to the pro forma amounts indicated
below:
(Continued)
56.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
2002 2001 2000
---- ---- ----
Net income (loss)
As reported $ (12,297) $ (637) $ 4,331
Pro forma (12,356) (696) 4,251
Earnings (loss) per share
Basic earnings (loss) per share as reported $ (7.17) $ (.37) $ 2.16
Pro forma basic earnings (loss) per share (7.20) (.40) 2.12
Diluted earnings (loss) per share as reported $ (7.17) $ (.37) $ 2.00
Pro forma diluted earnings (loss) per share (7.20) (.40) 1.96
The pro forma effects are computed using option pricing models utilizing the
following weighted- average assumptions as of the date of grant for 2000. There
were no options granted during 2002 and 2001.
<Table>
Risk-free interest rate 5.75%
Expected life 8.6 years
Expected volatility of stock price 20.60%
Expected dividend 1.79%
</Table>
Reclassification: Certain reclassifications have been made to the 2000 and
2001 information to conform to the 2002 presentation.
NOTE 2 - REGULATORY COMPLIANCE AND BUSINESS PLAN
The Office of Thrift Supervision (OTS) commenced risk-focused safety and
soundness examinations of the Savings Bank and the Bancorp on October 29, 2001
and November 14, 2001, respectively. Each OTS Report of Examination ("ROE"),
which was primarily based on financial information as of September 30, 2001, was
transmitted to the Savings Bank and Bancorp, respectively, in March 2002.
The November 14, 2001 Holding Company Report of Examination ("Bancorp ROE") was
not limited to any one area, but focused on the risk factors of Transactions
with Affiliates, Funds Distribution, Financial Effect and Management Quality.
During the course of the OTS examination, the Bancorp developed and implemented
policies and procedures to address the specific regulatory violations
identified.
(Continued)
57.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 2 - REGULATORY COMPLIANCE AND BUSINESS PLAN (Continued)
The OTS commented in the Bancorp ROE on the Bancorp's level of operating losses,
debt service requirements and capital position. As a result of the findings
contained in the Bancorp ROE, the Bancorp was required to provide OTS with a
quarterly financial cash flow projection report and quarterly monitoring
reports. The Bancorp was also required to take actions to ensure future
regulatory compliance, and take actions sufficient to ensure safe and sound
operations. In addition, the Bancorp was placed under various operating
restrictions, including a requirement that the Bancorp file notice with the OTS
prior to adding or replacing a director or hiring a senior executive officer.
The Bancorp was also restricted in making "golden parachute" payments to any
institution-affiliated party unless authorized by regulation. The Bancorp has
been, and is currently, in compliance with the requirements set forth by the
OTS, as a result of the findings contained in the Bancorp ROE.
The October 29, 2001, Report of Examination of the Savings Bank ("Savings Bank
ROE") focused on Capital Adequacy, Asset Quality, Management, Earnings,
Liquidity and Sensitivity to Market Risk. The OTS identified various regulatory
deficiencies resulting, in part, in supervisory imposed operating restrictions
on growth and lending activities, as well as restrictions on capital
distributions, contracts, "golden parachute" payments and changes in senior
executive positions. In addition, the Savings Bank was required to provide
reports to the OTS detailing corrective actions taken, identification of
policies and procedures adopted and implemented to remedy areas of criticism and
ensure future regulatory compliance. Management and the Board of Directors
responded to the Savings Bank ROE, and provided the OTS with either assurance of
compliance with the material exceptions noted in the Savings Bank ROE or the
current status of efforts to correct matters requiring on-going remediation.
Upon completion of the November 14, 2001 Bancorp ROE and October 29, 2001
Savings Bank ROE, management officials and the Boards of Directors of both the
Bancorp and the Savings Bank engaged in active discussions with the OTS to
develop a mutually agreeable business framework designed to strengthen the
regulatory foundation of the Bancorp and the Savings Bank. As a result, in the
spirit of regulatory cooperation, the Board of Directors of both the Bancorp and
the Savings Bank, without admitting or denying that such grounds exist, or the
accuracy of the OTS findings, opinions and/or conclusions, separately agreed to
enforcement actions that became effective on August 16, 2002.
The provisions of the enforcement action between the Bancorp and OTS
established, in principal part, that the Bancorp provide the OTS with a plan for
raising additional common equity capital and restructuring outstanding debt at
the Bancorp, recognizing that economic and market conditions are outside of the
control of the Bancorp. In addition to the operating restrictions previously
placed on the Bancorp by the OTS, pursuant to the November 14, 2001 Bancorp ROE,
the agreed upon action required the Bancorp to provide the OTS with quarterly
cash flow projections for the purpose of identifying the Bancorp's sources and
uses of funds for
(Continued)
58.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 2 - REGULATORY COMPLIANCE AND BUSINESS PLAN (Continued)
the remainder of fiscal 2002, fiscal 2003 and fiscal 2004. The subject
enforcement action also provides that the Bancorp ensure that all transactions
with affiliates comply with applicable statutory and regulatory regulations and
that the Bancorp maintain documentation sufficient to evidence such compliance.
The agreed upon language in the enforcement action between the Savings Bank and
the OTS provided, in principal part, for the establishment of a plan addressing
the level of the Savings Bank's fixed assets, as well as the adoption and
implementation of a capital plan for the establishment and maintenance of
acceptable capital levels. On March 24, 2003, the Savings Bank submitted to the
OTS a revised business plan which replaces the Savings Bank's previously filed
business plan, capital plan and staffing plan. The revised business plan details
the Savings Bank's overall operating strategies, in light of current economic
conditions, and the intent of the Board of Directors to reformulate and reduce
the Savings Bank's overall asset size. The agreed upon language of the
enforcement action also (without prior written approval of the OTS): prohibits
any increase in the Savings Bank's total assets during any quarter in excess of
an amount equal to net interest credited on deposit liabilities during the
quarter; and prohibits the purchase or origination of new loans other than
single-family residential mortgage loans, credit card loans and over draft lines
of credit. The Board of Directors has already taken action to alleviate many of
the issues raised by the OTS and has formalized plans, policies and procedures
concerning the Savings Bank's internal audit function, overall lending programs,
including loan administration, and refined its Allowance for Loan and Lease
Losses ("ALLL") policy and practices. In addition to the operating restrictions
previously imposed on the Savings Bank, as a result of the findings contained in
the Savings Bank ROE, the Savings Bank has developed and implemented policies
and procedures to: i) ensure compliance with its loans to one borrower
limitation; ii) address its classified assets; iii) monitor its interest rate
risk; and iv) ensure continued accurate thrift financial reports. Furthermore,
the Savings Bank has agreed not to accept, renew or roll over any brokered
deposits without the prior consent of the OTS. Beginning no later than fourth
quarter 2001, management of the Savings Bank had already initiated a plan not to
renew maturing brokered deposits. Additionally, the agreed upon action provides
for an independent loan review of the Saving Bank's construction, commercial
real estate, commercial, direct lease financing and broker purchase/repurchase
lending programs. Such independent loan review is in its final stages. Of
additional note, the Savings Bank will continue to utilize its Board of
Directors Joint Oversight Committee for the purpose of reviewing and approving
new lending and investment initiatives. To date, the Savings Bank is in full
material compliance with the provisions of the agreed upon enforcement action.
In addition, selected provisions of the mutually agreed upon enforcement action
have been modified, or activities approved, by the OTS at the express request of
the Savings Bank.
(Continued)
59.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 2 - REGULATORY COMPLIANCE AND BUSINESS PLAN (Continued)
On May 20, 2002, the OTS and FDIC began a joint Field Visit examination in
preparation for a joint risk-focused examination of the Savings Bank. According
to the OTS/FDIC regulators, the purpose of the Field Visit was, in part, to
obtain an initial assessment of the asset quality and capital levels of the
Savings Bank to determine the effectiveness of corrective actions taken by the
Board of Directors and management since the issuance of the Savings Bank ROE,
and establish the scope for the full joint risk-focused examination of the
Savings Bank and the Bancorp, each of which commenced on July 1, 2002.
The OTS and FDIC initiated a risk-focused examination of the Savings Bank on
July 1, 2002 focusing on the examination components of capital, assets,
management, earnings, liquidity and sensitivity, and represented a continuation
of the previous Field Visit. During the course of the examination,
representatives of the Savings Bank, as well as members of the Board of
Directors, met regularly and informally with representatives of both the OTS and
FDIC to address issues, provide informational updates and enhance the existing
avenues of communication that had been previously established. During the course
of the examination, on September 17, 2002, the OTS issued a letter to the
Savings Bank requiring, in part, the Savings Bank to (i) establish position and
loss limits for its available for sale investment portfolio; (ii) reduce its
borrowings under reverse repurchase agreements and margin debt to $0 and
discontinue their use other than the permitted use of reverse repurchase
agreements up to $10 million for liquidity purposes; (iii) reduce its investment
in a pass through investment mutual fund to a predetermined percentage; (iv)
suspend its trading portfolio; and (v) revise its Investment Policy accordingly.
Also during the examination, the OTS and FDIC, in part, raised and discussed
with management concerns over the Savings Bank's staffing levels, overall level
of expenses, long-term earnings potential and the effect of earnings on the
Savings Bank's long-term capital position. Any issues identified by the OTS and
FDIC examiners during the course of the July 1, 2002 examination were addressed,
and appropriate action was taken by the Savings Bank, or is currently being
taken by the Savings Bank's management in consultation with the OTS. The July 1,
2002 examination of the Savings Bank culminated in a routine exit meeting with
representatives from the Savings Bank, OTS and FDIC.
Also on July 1, 2002, the OTS commenced a risk-focused examination of the
Bancorp, focusing primarily of the Bancorp's financial condition and represented
a continuation of the previous Field Visit. As with the Savings Bank
examination, members of the Bancorp's management team, as well as members of the
Board of Directors, met regularly and informally with representatives of the OTS
to address issues, provide informational updates and enhance the existing
avenues of communication previously established. During the examination, the OTS
discussed its concerns with management regarding issues including, but not
limited to, earnings, its leverage position, investment strategies, liquidity
and capital. Any issues raised by OTS during the examination were addressed
during the examination by management and continue to be of primary focus by the
Board of Directors. The July 1, 2002 examination culminated in a routine exit
meeting with representatives from the Bancorp and OTS, as well as
representatives from the FDIC.
(Continued)
60.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 2 - REGULATORY COMPLIANCE AND BUSINESS PLAN (Continued)
As part of the continuing regulatory spirit of cooperation and the mutual desire
for future success, both the Bancorp and the Savings Bank are providing reports
to, and consulting with, the OTS on all matters addressed under the agreed upon
enforcement actions and issues raised during the aforementioned examinations.
During November 2002, the Board of Directors of the Bancorp and Savings Bank
approved plans for increasing capital levels at both the Bancorp and Savings
Bank as well as a business plan at the Savings Bank level which outlined the
future operating strategies of the Savings Bank to achieve the targeted capital
levels along with providing the framework for achieving profitability. The plans
were delivered to the OTS for their review and approval. To achieve the targeted
capital levels and profitability levels, the business plan of the Savings Bank
highlighted the following actions: (1) reduction of total assets to $250 million
by March 31, 2003, to be achieved through the reduction of deposits by the
selling of the Savings Bank's branch deposits and operations, rate reductions
and the early redemption of brokered deposits with corresponding decreases in
loans and investments; (2) the elimination of certain lending programs; (3) a
restructuring of the Savings Bank's statement of financial condition to achieve
the desired mix of interest earning assets and interest bearing liabilities; (4)
staff and management reductions; (5) consolidation of personnel into one
facility to achieve overhead reductions and economies of scale; (6) reductions
in general and administrative expenses; and (7) capital infusions from the
Bancorp. The increase in capital levels at the Bancorp is to be achieved through
capital infusions from current principal shareholders and potential third party
investors.
On February 28, 2003, the Savings Bank withdrew its business plan previously
submitted to the OTS. On March 24, 2003, the Board of Directors submitted a
revised Savings Bank business plan to the OTS for their review and nonobjection.
The revised business plan includes significant further reductions of total
assets by December 31, 2003. To achieve the revised business plan balance sheet
reductions, the Savings Bank and the Company will continue to identify
additional assets to be held for sale. Based on the Savings Bank's initial
analysis, the fair value of assets to be held for sale exceeds the book value.
NOTE 3 - SALE OF ON-LINE FINANCIAL SERVICES, INC.
On March 31, 1999, the Company sold On-Line for cash proceeds of $6,700,000 and
$4,600,000 in Series B preferred stock of GFS Holdings Co. As part of the
acquisition of On-Line by Argo Bancorp in 1995, a structured schedule of
contingent payments was established based on a percentage of future net revenues
of On-Line over the next seven years ending October 31, 2002. As a condition of
the acquisition, Umbrella Bancorp, Inc. retained this liability to the former
stockholders of On-Line.
At December 31, 2002, the Company estimated the liability for future contingent
payments to be $116,000. During 2003, the final calculation of the liability
will be made and paid.
(Continued)
61.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 4 - SECURITIES
The fair value of securities available-for-sale and the unrealized gains and
losses recognized in accumulated other comprehensive income (loss) were as
follows (in thousands):
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
----------- ----------- -----------
December 31, 2002
Municipal securities $ 4,475 $ 32 $ (31)
U.S. agency securities 20,360 145 -
Corporate bonds 1,972 8 (52)
Mortgage-backed securities and
collateralized mortgage
obligations 71,038 124 (223)
Trust preferred securities 4,303 15 (192)
Marketable equity securities 3,465 10 (93)
----------- ----------- -----------
$ 105,613 $ 334 $ (591)
=========== =========== ===========
December 31, 2001
Municipal securities $ 18,745 $ 22 $ (553)
U.S. agency securities 2,975 14 (34)
Corporate bonds 4,684 3 (10)
Mortgage-backed securities and
collateralized mortgage
obligations 49,240 19 (547)
Trust preferred securities 32,275 74 (530)
Marketable equity securities 15,199 170 (453)
----------- ----------- -----------
$ 123,118 $ 302 $ (2,127)
=========== =========== ===========
Securities held-to-maturity at December 31, 2001 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
U.S. agency securities $ 1,174 $ 9 $ (28) $ 1,155
Corporate bonds 685 - (2) 683
----------- ----------- ----------- -----------
$ 1,859 $ 9 $ (30) $ 1,838
=========== =========== =========== ===========
(Continued)
62.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 4 - SECURITIES (Continued)
Included in mortgage-backed securities (MBS) and collateralized mortgage
obligations (CMOs), are Fannie Mae, Freddie Mac, and Government National
Mortgage Association ("GNMA") MBS and CMOs with a fair value of $71.0 million at
December 31, 2002. Of the $71.0 million, $30.5 million was invested in mortgage
mutual funds, which are managed by Shay Assets Management, Inc. and The Vanguard
Group. These mortgage mutual funds invest in AAA mortgage-related securities
issued or guaranteed directly by the United States or by U.S. Government
agencies. There were no concentrations by issuer at December 31, 2001.
Trust preferred securities (TPS) include issues of a diverse group of banks,
savings institutions and their related holding companies located throughout the
United States. There are no concentrations in TPS by a single issuer at December
31, 2002.
Marketable equity securities include investments in common stocks of various
financial institutions.
The fair value of securities available-for-sale, by contractual maturity, at
December 31, 2002 are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Securities not due at
a single maturity date, primarily MBSs, CMOs and marketable equity securities,
are shown separately. Amounts shown are in thousands.
Due after five years through ten years $ 2,499
Due after ten years 28,611
------------
31,110
Mortgage-backed securities and
collateralized mortgage obligations 71,038
Marketable equity securities 3,465
------------
$ 105,613
============
Proceeds from sales of securities available-for-sale and the realized gross
gains and losses are as follows:
Year ended December 31,
--------------------------------------------
2002 2001 2000
---- ---- ----
(In thousands)
Proceeds from sales $ 157,589 $ 126,838 $ 1,144
Gross realized gains 2,291 1,728 151
Gross realized losses (2,793) (317) (262)
(Continued)
63.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 4 - SECURITIES (Continued)
At December 31, 2002 and 2001, securities with carrying values of $41.2 and $3.5
million were pledged to secure short-term borrowings and Federal Home Loan Bank
advances.
NOTE 5 - LOANS RECEIVABLE
Loans receivable, including loans held for sale, are summarized as follows.
Other commercial loans include those secured by non-residential real estate and
other assets.
December 31,
------------------------------
2002 2001
---- ----
(In thousands)
One-to-four-family mortgage loans $ 54,637 $ 195,603
Commercial multi-family secured real estate loans 10,799 38,722
Direct financing leases 4,029 4,368
Other commercial loans 47,182 74,986
Home equity loans 4,219 4,304
Other loans 1,654 1,235
------------ ------------
Total gross loans receivable 122,520 319,218
Add (deduct)
Allowance for loan losses (4,148) (2,984)
Deferred loan costs 472 1,050
Unearned discounts, net of premiums (2,392) (1,875)
------------ ------------
$ 116,452 $ 315,409
============ ============
As of December 31, 2002, loans held for sale consisted of loans under the
purchase repurchase program and loans held for sale-other, as described in the
following paragraph. Loans held for sale-purchase repurchase as of December 31,
2002 and 2001 were $647,000 and $65.1 million, respectively, and are included in
one-to-four family mortgage loans. During the third quarter of 2002, the Company
decided to cease its lending activity under the purchase repurchase program as a
result of regulatory dissatisfaction with, and criticisms of, the program and
considering the profitability of the program, as described further in Note 2 -
Regulatory Compliance and Business Plan. The termination of the purchase
repurchase loan program was completed in January 2003. Based on the sales prices
received the actual gains on these sales were not significant to operations.
(Continued)
64.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 5 - LOANS RECEIVABLE (Continued)
Loans held for sale-other, which totaled $19.8 million as of December 31, 2002,
consists of $2.1 million of one-to-four family mortgage loans and $17.7 million
of commercial and commercial real estate loans which the Company has identified
as held for sale in conjunction with the Company's business plan as described
further in Note - 2 Regulatory Compliance and Business Plan. Based on the bid
prices received, anticipated gains on these sales are not expected to be
significant to future operations.
During 2002, $73.7 million of loans held for sale-other were transferred from
the loans receivable portfolio and were recorded at the lower of cost or fair
value with no resulting loss on transfer. Of these loans, $53.8 million were
sold prior to December 31, 2002.
The following is a summary of the changes in the allowance for loan losses:
Year ended December 31,
------------------------------------------
2002 2001 2000
---- ---- ----
(In thousands)
Balance at beginning of year $ 2,984 $ 2,440 $ 1,551
Provision for loan losses 9,807 1,710 1,218
Recoveries 104 - -
Charge-offs (8,747) (1,166) (329)
----------- ----------- -----------
Balance at end of year $ 4,148 $ 2,984 $ 2,440
=========== =========== ===========
Impaired loans were as follows:
2002 2001
---- ----
(In thousands)
Year-end loans with no allocated allowance
for loan losses $ 4,885 $ -
Year-end loans with allocated allowance for
loan losses 529 529
--------- ---------
Total $ 5,414 $ 529
========= =========
Amount of allowances for losses allocated $ 500 $ 500
========= =========
(Continued)
65.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 5 - LOANS RECEIVABLE (Continued)
Year ended December 31,
------------------------------------------
2002 2001 2000
---- ---- ----
(In thousands)
Average impaired loans during the year $ 3,607 $ 1,427 $ -
Non performing loans and impaired loans are defined differently. Some loans may
be included in both categories, whereas other loans may only be included in one
category.
Loans receivable on nonaccrual are as follows (in thousands):
December 31, 2002 $ 19,663
December 31, 2001 9,000
The significant provisions and charge-offs recorded during 2002 can be
attributable to several internal and external factors, as described below:
During the second quarter 2002, the Savings Bank started and completed the
conversion of its commercial loan portfolio, which totaled $126.6 million as of
March 31, 2002, to a new loan software subsidiary ledger system. As part of that
conversion, the Savings Bank performed an extensive review of its loan files,
payment histories, delinquency reporting and its loan classification reporting
(e.g. special mention, substandard, doubtful and loss). The results of these
procedures indicated that the Savings Bank's loan files related to certain loans
were missing required documentation in accordance with the Savings Bank's
underwriting standards. Management downgraded any loans where sufficient
supporting documentation was not currently in the loan file. In addition,
certain payment histories did not accurately reflect the loan's current payment
status, and as such, the Savings Bank's delinquency reporting and loan
classification reporting excluded certain loans. Accordingly, these loans were
either classified for the first time or downgraded during the quarter ended June
30, 2002.
In addition, during the second quarter of 2002, commercial loan borrowers with
loans totaling approximately $3.6 million either declared, or it was anticipated
that they would likely declare, bankruptcy. Although some of these loans had
been previously classified, management downgraded these loans in the second
quarter of 2002 due to the actual and likely bankruptcy filings and recorded a
provision related to these loans totaling $1.9 million, of which $1.6 million
was subsequently charged-off. The remaining $2.0 million of loans that were not
charged off consist of two loans. The first is a loan with a remaining balance,
as of December 31, 2002 of $1.5 million, with an allowance allocation of
$220,000. This loan is secured by leases on consumer "photo center" equipment
deployed in a national retailer. Management anticipates that during April 2003
the national retailer will reaffirm its obligation under these
(Continued)
66.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 5 - LOANS RECEIVABLE (Continued)
leases as part of its emergence from bankruptcy. The second is a loan with a
remaining balance, as of December 31, 2002 of $364,000, with an allowance
allocation of $55,000, and is secured by single-family real estate. The Company
also provided for and charged off $2.5 million related to one loan relationship
during the second quarter of 2002. Based upon financial information received
during the second quarter 2002 related to this borrower, updated information
received related to the collateral for certain of these loans, and updated
information related to the borrower's business as a whole, the Company charged
off the entire relationship balance in question and is pursuing recovery.
Management intends to actively seek recovery of charged off loan assets through
legal proceedings. Management also increased its allowance factors within all
commercial loan classifications, based on current economic factors.
During the third quarter 2002, the Savings Bank charged-off $2.5 million related
to loans or pools of loans which it had previously provided an allowance of $1.0
million. The most significant was a $3.0 million commercial non-residential loan
in which $1.9 million was charged-off, $900,000 of which had previously been
reserved. During the third quarter, the principal of the company which was
developing the property was indicted for bank fraud related to his financial
dealings with another financial institution. The Company intends to pursue all
avenues against the principal of the development company and his professional
service firms to recover its investment in this loan; however, as of September
30, 2002 the loan was written down to its fair value based on recent appraisals
of the land collateralizing the loan. During March 2003, the Company received
title to this property.
During 2002, delinquencies increased in the single-family mortgage loan
portfolio. The total amount of single-family mortgage loans ninety (90) days or
more past due at December 31, 2001, March 31, 2002, June 30, 2002, September 30,
2002 and December 31, 2002 were $7.6 million, $10.6 million, $14.6 million,
$16.6 million and $14.9 million, respectively. Management believes these
increases are attributable to a declining economy and higher unemployment
levels. To address this situation, the Savings Bank lowered the classification
on certain pools of loans and also increased its allowance factors within
certain single-family loan classifications.
During the fourth quarter of 2002, the Savings Bank recaptured $500,000 of
provision for loan losses recorded in previous quarters mainly related to the
successful termination of the purchase/repurchase loan program. As of September
30, 2002 the purchase/repurchase portfolio had an allowance for loan losses
allocation of $413,000. The program termination was completed January 2003 with
no losses incurred.
(Continued)
67.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 5 - LOANS RECEIVABLE (Continued)
Nonaccrual loans as a percentage of gross loans, excluding discounted loans,
increased from 2.82% to 16.15% as of December 31, 2001 and 2002, respectively.
The increase is due to the increased delinquent loans as discussed above and the
$196.7 million decrease in gross loans receivable which is significantly related
to the business plan objectives. During 2003, management anticipates the
nonaccrual loans will be sold or transferred to foreclosed real estate for their
ultimate disposition.
As discussed more fully in the Note 2 - Regulatory Compliance and Business Plan,
during May 2002, the OTS and the FDIC began a joint Field Visit examination in
preparation for a joint risk-focused examination of the Savings Bank and the
Bancorp, which commenced on July 1, 2002, and completed January 31, 2003. This
examination follows the safety and soundness examinations by the OTS of the
Savings Bank and Bancorp completed January 2002, for which the Reports of
Examinations were delivered to the Savings Bank and Bancorp in March 2002 and in
which no loans were classified as "loss" assets.
During the most recent joint OTS/FDIC safety and soundness examination,
management met with the OTS/FDIC representatives numerous times. Based on those
meetings, management believes that the loans have been properly graded by
management and the Company's analysis of its ALLL, as of December 31, 2002, has
properly considered the concerns conveyed by the OTS/FDIC representatives
related to the status of the Savings Bank's loan files, delinquency reporting,
and loan classification reporting. Based on these factors, management believes
that the ALLL as of December 31, 2002 is adequate.
Management has taken the following steps to improve its ALLL reporting,
delinquent loan reporting and its loan classification reporting: (1) as
previously discussed, the Savings Bank completed the conversion of its
commercial loan portfolio to a new loan software subsidiary ledger system; as
part of that conversion, all commercial loans were re-amortized to determine
that the principal and accrued interest balances were accurate (requiring
minimal adjustment to either the principal or accrued interest), and all other
significant information (such as origination date, interest rate, maturity date,
payment dates, etc.) was re-verified to source documents such as the original
note or payment tickets; and (2) during the period July 2002 to October 2002,
the Savings Bank has expanded its commercial loan department by hiring several
mid-level managers to effectively monitor and evaluate the commercial loan
portfolio.
First mortgage loans at December 31, 2002 and 2001 include $ 44.7 million and
$130.1 million in out-of-area purchased participation and whole loans, which are
secured by single-family homes, with approximately 29.88% in Texas, 15.19% in
Arizona, 13.79% in California, 4.82% in New York, 3.47% in Georgia, and 32.85%
spread throughout the remainder of the country at December 31, 2002.
(Continued)
68.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31,
-----------------------------
2002 2001
---- ----
(In thousands)
Land $ - $ 1,668
Office buildings and improvements 168 3,288
Leasehold improvements - 768
Automated teller machines (ATMs) 15,110 13,714
Furniture, fixtures, and equipment 1,267 1,417
Software and capitalized conversion costs 2,581 2,436
----------- -----------
19,126 23,291
Less accumulated depreciation and amortization (5,650) (2,682)
----------- -----------
$ 13,476 $ 20,609
=========== ===========
Premise and equipment held for sale are summarized as follows:
2002
----
Land $ 1,668
Office buildings and improvements 3,187
Leasehold improvements 817
Automated teller machines (ATMs) 69
Furniture, fixtures, and equipment 203
----------
5,944
Less accumulated depreciation and amortization (543)
----------
$ 5,401
==========
During June 2002, the Savings Bank classified its investment in an office
building as held for sale and, as such, it is being carried at the lower of cost
or fair value. This building was purchased in April 2001 as a branch location
for the Savings Bank. As of December 31, 2002, the net book value of this office
building was $4.6 million. During the 2002 and 2001, occupancy and equipment
expense was reduced by approximately $626,000 and $420,000 related to rental
income from the building and included approximately $258,000 and $199,000 of
expenses from the building, respectively. In addition, as of September 30, 2002,
the Savings Bank classified land, leasehold improvements and furniture, fixtures
and equipment located in its two branch locations and corporate office as held
for sale. As of December 31, 2002, the net book values of these items were
$835,000. As described further in Note 8 - Deposits, the Savings Bank has
entered into contracts for the sale of its two branch locations including the
leasehold improvements and deposits. The purchasers will also assume the lease
obligations as of the closing of the sales. In addition, as discussed further in
Note 2 - Regulatory Compliance and Business Plan, the Company is exploring the
consolidation of its corporate locations which would result in the sale of
certain land, leasehold improvements and furniture, fixtures and equipment at
these locations. The Company currently leases the facilities it utilizes for its
branch and corporate locations from third parties. Management anticipates that
new tenants for
(Continued)
69.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 6 - PREMISES AND EQUIPMENT (Continued)
its corporate locations would also acquire the leasehold improvements and
furniture and fixtures at these locations. Accordingly, the Company has recorded
no impairment charges for the assets as of December 31, 2002.
On March 31, 2003, the two principal shareholders of the Company entered into an
agreement with the Company and third party owner of one of the Company's
corporate locations to assume the obligation under this lease. The transfer of
the lease obligations to the principal shareholders allowed the Company to
reverse the deferred gain and record additional paid-in capital in the amount of
$987,000 related to this corporate location as of March 31, 2003.
During 1999, the Company sold five banking facilities to an unrelated third
party for $5,850,000. The gain of $2,400,000 was deferred as the Company leased
these facilities from the purchaser. During 2000, deposits totaling $113,585,000
for two of these locations and a third location which was leased by the Company
were sold to a party unrelated to the 1999 transaction, and all three leases
were assumed by that entity. The Company recognized a gain of $7,974,000 on the
deposit sale, net of expenses of $1,216,000. In addition, during 2000, the
Company recognized a portion of the deferred gain for the two branch facilities
sold. Activity in the deferred gain account was as follows for the years ended
December 31, 2002, 2001, and 2000:
2002 2001 2000
---- ---- ----
(In thousands)
Balance at beginning of year $ 1,479 $ 1,595 $ 2,314
Amortization of deferred gain (127) (116) (128)
Recognized upon lease assumption - - (591)
----------- ----------- -----------
Balance at end of year $ 1,352 $ 1,479 $ 1,595
=========== =========== ===========
Included in occupancy and equipment expense is depreciation expense of office
properties and equipment of approximately $1,140,000, $1,301,000, and $1,796,000
for the years ended December 31, 2002, 2001, and 2000. Depreciation expense for
ATMs is net of leasing reimbursements totaling $2.3 million, $1.1 million and
$592,000 for 2002, 2001, and 2000.
Included in software is approximately $1,002,000 of costs for software licensing
rights acquired and other system related conversion costs amortized to expense
on a straight-line basis over periods of 5 to 7 years. Also included is
approximately $926,236 of capitalized internal software development costs
primarily related to the Savings Bank's Internet platform, amortized over
periods of 1 to 3 years.
(Continued)
70.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 6 - PREMISES AND EQUIPMENT (Continued)
During May 2002, the Savings Bank purchased approximately 217 ATMs for $1.3
million; such ATMs were deployed in convenience stores throughout the Midwest.
During August 2001, the Savings Bank purchased approximately 850 ATMs for $7.75
million and another 12 ATMs during December 2001 for $114,000; such ATMs were
deployed in gas station/convenience stores throughout the Midwest.
The Company leases office space under its noncancelable operating leases. The
Company also leases space for a data processing center under a lease that renews
on an annual basis. Rent expense for the years ended December 31, 2002, 2001,
and 2000 totaled $534,000, $679,000, and $668,000. The lease expense for 2000
included $304,000 related to the three branch facilities that were sold.
The estimated minimum rental payments under the terms of the leases at December
31, 2002 are as follows. The minimum rental payments have been adjusted for the
sale of two branch locations and the transfer of certain lease obligations by
the Company to its principal shareholders as discussed above.
Year ended December 31 Amount
- ---------------------- ------
(In thousands)
2003 $ 177
2004 69
2005 46
----------
Total minimum lease payments $ 292
==========
NOTE 7 - LOAN SERVICING, PURCHASED MORTGAGE SERVICING RIGHTS, AND
INVESTMENT IN LIMITED PARTNERSHIP
The cost of acquiring servicing rights from third parties to service mortgage
loans is capitalized and amortized in proportion to and over the period of the
estimated net servicing income. At December 31, 2002 and 2001, the Savings Bank
held $105,000 and $337,000 in purchased mortgage servicing rights (PMSRs).
The balance of investment in limited partnership of $1.2 million and $3.7
million at December 31, 2002 and 2001 represents the Savings Bank's investment
in various divisions of a single limited partnership. The investment at December
31, 2002 and 2001 includes a $910,000 and a $3.0 million equity interest in a
limited partnership whose business activities are to purchase mortgage servicing
rights, and a $288,000 and a $751,000 investment in subordinated debentures of
the partnership. The debentures have an interest rate of 30%. During 2002 and
(Continued)
71.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 7 - LOAN SERVICING, PURCHASED MORTGAGE SERVICING RIGHTS, AND
INVESTMENT IN LIMITED PARTNERSHIP (Continued)
2001, the Company recorded $2.5 million and $1.1 million as a reserve against
its interest in the limited partnership and subordinate debentures due to the
impact of declines in interest rates and the adverse effect of increased loan
prepayment speeds on the value of PMSRs. In addition, a $5.0 million escrow
deposit of the PMSR servicer is maintained at the Savings Bank. The fair value
of this escrow deposit is reflected in determining the fair value of the
investment in limited partnership. Based on a ruling from the OTS, the value of
the escrow deposit declined by $1.6 million which is a component of the $2.5
million reserve recorded in 2002 against the investment in limited partnership.
In 1999, the Company reinvested the equity in one division into another
previously owned division. The single business activity of this limited
partnership is the purchase of current mortgage servicing rights. There are
several equity investors in each division of the partnership. The purchase of
the servicing rights is leveraged, allowing the partnership to purchase
additional servicing rights. At the end of five years, or at such time as the
investors agree, the servicing rights will be sold and the proceeds divided pro
rata among the investors. As with typical investments in PMSRs, the collateral
underlying the equity investment is the servicing rights. All purchases of
servicing rights must be approved by all equity investors. The administration
and servicing of the purchased portfolios in each division is performed by the
general partner.
NOTE 8 - DEPOSITS
Deposits at December 31 are summarized as follows (dollars in thousands):
2002 2001
---- ----
Non-interest-bearing $ 5,835 $ 3,879
Savings accounts 13,127 7,352
NOW accounts 41,492 42,061
Money market accounts 96,512 143,918
Certificate accounts 125,081 260,937
------------ ------------
$ 282,047 $ 458,147
============ ============
At year-end 2002, maturities of time deposits were as follows (in thousands):
12 months or less $ 61,525
13 months to 36 months 46,694
37 months or more 16,862
------------
$ 125,081
============
(Continued)
72.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 8 - DEPOSITS (Continued)
The Company had no brokered deposits at December 31, 2002. At December 31, 2001
the Company had $104.6 million of brokered deposits. The decline in brokered
deposits during 2002 was due to the Savings Bank's effort not to renew maturing
brokered certificates of deposit ("CDs") yielding higher interest rates and the
Savings Bank's early redemption of $48.9 million of brokered CDs during
September and December 2002. In conjunction with the early redemptions of the
high yielding brokered CDs, the Savings Bank incurred additional interest
expense of $1.0 million during 2002. This will have a positive effect on the
cost of funds in future periods.
As discussed in Note 2 - Regulatory Compliance and Business Plan, to achieve the
desired capital levels and profitability levels, the business plan of the
Savings Bank anticipates reduction of total assets to $250 million by March 31,
2003 to be achieved through reduction of deposits by selling the Savings Bank's
branch deposits and operations, rate reductions and the early redemption of
brokered deposits. On January 31, 2003, the Savings Bank executed a Branch Sale
Agreement to sell its branch office in Chicago, Illinois with approximately $6.7
million in deposits. On January 24, 2003, the Savings Bank entered into a
separate Branch Purchase and Assumption Agreement to sell its other branch
office located in Dolton, Illinois with approximately $21.5 million in deposits.
Both contracts included the sale of leasehold improvements and furniture,
fixtures and equipment at the locations along with the assumption of the
buildings' lease obligations. The sale of the Chicago branch closed March 28,
2003 and the Dolton branch sale is expected to close April 26, 2003. During
2003, the Savings Bank anticipates recording a gain on the sales transactions of
$1.4 million, including recognition of the deferred gains on the branch
buildings sold in prior years.
The Savings Bank has pledged investment securities of approximately $2.8 million
and $2.4 million at December 31, 2002 and 2001 as collateral to secure certain
public deposits. In addition to securities at December 31, 2001, the Savings
Bank also had letters of credit totaling $14.2 million as collateral to secure
several State of Illinois certificates totaling $14.0 million. The aggregate
amount of certificate of deposit accounts with a balance greater than $100,000
was $39.6 million and $80.8 million at December 31, 2002 and 2001.
Interest expense on deposit accounts is summarized as follows (in thousands):
Year ended December 31,
-----------------------------------------
2002 2001 2000
---- ---- ----
Savings $ 243 $ 117 $ 490
NOW accounts 1,061 1,111 149
Money market accounts 3,269 5,487 925
Certificate accounts 12,421 18,946 17,525
----------- ----------- -----------
$ 16,994 $ 25,661 $ 19,089
=========== =========== ===========
(Continued)
73.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 9 - BORROWINGS AND JUNIOR SUBORDINATED DEBT
Borrowed money at December 31 is summarized as follows:
Weighted Interest Rate Balance
December 31, December 31,
------------ ------------
Maturity 2002 2001 2002 2001
-------- ---- ---- ---- ----
(In thousands)
Advances from the Federal
Home Loan Bank of Chicago
Fixed rate 04/20/03 6.13% 6.13% $ 2,760 $ 2,760
Fixed rate 11/25/06 6.58 6.58 10,000 10,000
---------- ----------
6.48 6.48 12,760 12,760
Notes payable
Variable rate 01/30/03 7.00 5.75 4,250 5,000
Fixed rate 03/31/03 10.00 10.00 2,000 3,500
Variable rate Demand 7.41 -- 295 --
Subordinated debentures 12/08/11 5.78 6.01 3,000 3,000
Federal funds purchased 01/02/03 -- 2.00 -- 2,400
Margin accounts Open line -- 3.92 -- 1,683
---------- ----------
6.81 6.21 $ 22,305 $ 28,343
========== ==========
The required aggregate principal balance of first mortgage loans securing
advances is determined by the Federal Home Loan Bank of Chicago (FHLB). At
December 31, 2002 and 2001, approximately $5.6 million and $40 million of
specifically identified loans were pledged and delivered to the FHLB. All stock
in the Federal Home Loan Bank of Chicago is also pledged as collateral for these
advances. Additionally, securities having a carrying value of $41.2 million and
$1.5 million were pledged against advances at December 31, 2002 and 2001.
As of December 31, 2002 the Company had no margin account loans outstanding. At
December 31, 2001, the margin account loans were from third-party securities
brokers and were secured by securities which are held by the broker and had a
market value of $3.3 million.
In 2001, the Company borrowed $5.0 million to fund the repurchase of shares of
common stock. The note is secured by all common stock of the Savings Bank.
Interest on the note is payable quarterly. During 2002, the Company made
principal reductions of $750,000 and the lender extended the due date of the
note to January 30, 2003 and increased the interest rate to 7%. On March 31,
2003, the Company paid off the remaining balance of $4,250,000 with the proceeds
from capital contributions from the Company's two principal shareholders.
(Continued)
74.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 9 - BORROWINGS AND JUNIOR SUBORDINATED DEBT (Continued)
In 2001, the Company borrowed an additional $3.5 million. During 2002, the
Company made principal reductions of $1.5 million and the lender extended the
due date of the note to March 31, 2003. The note is secured by certain
securities with carrying values of $2.0 million at December 31, 2002. Interest
on the note is payable monthly. During January and February 2003 the Company
paid-off the $2 million note payable with the proceeds from the sale of an
available-for-sale security and capital contributions from the Company's two
principal shareholders.
In November of 2001, the Savings Bank issued $3.0 million of subordinated debt
in a private placement transaction to increase working capital. On December 5,
2001, the Savings Bank filed an application with the OTS seeking inclusion of
the proceeds of the sale of the debentures in regulatory "Tier II" (risk
weighted) capital. As of June 28, 2002, the OTS approved the application. Debt
issuance costs totaling $120,000 were capitalized related to the debenture
offering and are being amortized over the 10 year life of the issuance.
As part of the business plan discussed in Note 2, on February 28, 2003, the
Savings Bank paid-off the $2.8 million Federal Home Loan Bank Advance due April
20, 2003. The Savings Bank incurred a penalty of $17,600 related to this
transaction.
Additionally, the Company has issued 11% junior subordinated debentures
aggregating $17,784,000 to Argo Capital Trust Company (Trust). The Trust issued
11% capital securities with an aggregate liquidation amount of $17,250,000 ($10
per capital security) to third-party investors. The capital securities and cash
are the sole assets of the Trust. The junior subordinated debentures are
includable as Tier I capital for regulatory capital purposes. The junior
subordinated debentures and the capital securities pay dividends and
distributions, respectively, on a quarterly basis, which are included in
interest expense.
The Trust is a statutory business trust formed under the laws of the State of
Delaware and its common stock is wholly owned by the Company. The junior
subordinated debentures will mature on November 6, 2028, at which time the
capital securities must be redeemed. The junior subordinated debentures and
capital securities can be redeemed contemporaneously, in whole or in part,
beginning November 6, 2003 at a redemption price of $10 per capital security.
The Company has provided a full and unconditional guarantee of the obligations
of the Trust under the capital securities in the event of the occurrence of an
Event of Default, as defined. Debt issuance costs totaling $1,913,000 were
capitalized related to the debenture offering and are being amortized over the
30-year life of the junior subordinated debentures.
In 2000, Argo Redemption was formed for the purpose of repurchasing a portion of
the 11% capital securities. Argo Redemption held 12,700 and 64,717 shares of the
11% capital securities at cost basis of $127,000 and $647,170 at December 31,
2002 and 2001. During 2002 and 2001, Argo Redemption reissued 87,217 and 65,400
shares for $830,000 and $655,000 and repurchased an additional 35,200 and 63,824
shares at a cost basis of $292,000 and $639,000. Gains of
(Continued)
75.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 9 - BORROWINGS AND JUNIOR SUBORDINATED DEBT (Continued)
$38,000, $103,000, and $92,000 are included with other income in the
consolidated statement of operations for the years ended December 31, 2002, 2001
and 2000. The 11% capital securities can be resold.
On February 27, 2003 the Company announced its intention to repurchase from time
to time in open market as well as privately negotiated transactions shares of
the Trust's 11% securities, which trade under the symbol "ATP_P" on the American
Stock Exchange. The present authorization does not impose any specific limit on
the number of Trust securities which may be repurchased, and is being undertaken
in order to reduce debt and debt-like obligations as required by the capital
plan as discussed in Note 2 - Regulatory Compliance and Business Plan. The
continuing payment on the Trust securities is dependent on the Company's
continuing ability to make payments on the subordinated debenture it issued to
the Trust in connection with the 1998 public offering. In the absence of prior
written approval, the Savings Bank is currently precluded from making dividend
payments to the Company under mutual agreement with the OTS. Consequently, no
assurance can be made that the Company will continue to make dividend payments
on the Trust securities. In the event that shares are repurchased and retired,
the Company will accelerate the amortization of the debt issuance costs
attributable to each security.
NOTE 10 - INCOME TAXES
Income tax expense (benefit) from continuing operations consists of the
following:
Year ended December 31,
-----------------------------------------
2002 2001 2000
---- ---- ----
(In thousands)
Federal
Current $ (854) $ (1,495) $ 75
Deferred (6,651) (587) 1,054
----------- ----------- -----------
(7,505) (2,082) 1,129
State
Current (118) (291) 120
Deferred (1,412) (68) (22)
----------- ----------- -----------
Total income tax expense (benefit) $ (9,035) $ (2,441) $ 1,227
=========== =========== ===========
(Continued)
76.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 10 - INCOME TAXES (Continued)
The tax effects of existing temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 2002 and
2001 are summarized as follows:
December 31,
--------------------------
2002 2001
---- ----
(In thousands)
Deferred tax assets
Net operating loss and unused tax credits $ 7,046 $ 465
Allowance for loan losses 1,607 1,156
Deferred gain on sale of fixed assets 524 572
Limited partnership interest 414 -
Unrealized losses on securities available-for-sale 95 693
----------- -----------
Gross deferred tax assets 9,686 2,886
Deferred tax liabilities
Excess tax bad debt deduction (5) (10)
Limited partnership interest -- (581)
Other (2) (81)
----------- -----------
Gross deferred tax liabilities (7) (672)
----------- -----------
Net deferred tax asset $ 9,679 $ 2,214
=========== ===========
The effective income tax rate differs from the statutory federal tax rate of
34%. The major reasons for this difference related to income (loss) for the
years ended December 31 follow:
Year ended December 31,
------------------------------------------
2002 2001 2000
---- ---- ----
(In thousands)
Federal income tax (benefit) at statutory rate $ (7,253) $ (1,046) $ 1,890
Increase (decrease) in tax resulting from:
Municipal interest, net (608) (905) (11)
Tax credits (300) (300) (300)
Benefit of prior year net operating losses -- -- (258)
State taxes and other, net (874) (190) (94)
----------- ----------- -----------
Income tax expense (benefit) $ (9,035) $ (2,441) $ 1,227
=========== =========== ===========
(Continued)
77.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 10 - INCOME TAXES (Continued)
At December 31, 2002, the Bancorp has federal net operating loss carryforwards
of approximately $12,500,000 and state net operating loss carryforwards of
approximately $16,000,000, which will begin to expire in 2022. In addition,
Umbrella Bancorp has low income housing and alternative minimum tax credit
carryforwards of approximately $2,250,000 expiring through 2022. Based on
management's projections of future taxable income, no valuation allowance is
recorded against the deferred tax asset.
NOTE 11 - EMPLOYEE BENEFIT PLANS
401(k) PLAN AND TRUST
The Argo Federal Savings 401(k) (the "plan") is an ERISA-qualified plan covering
all employees of the Savings Bank who have completed at least 1,000 hours of
service within a 12 consecutive month period and are age 21 or older.
Participants may make contributions to the plan from 1% to 12% of their
earnings, subject to Internal Revenue Service (IRS) limitations. Discretionary
matching contributions of 50% of each participant's contribution up to 12% may
be made by the Savings Bank each plan year. The Savings Bank made contributions
of $54,000, $65,000, and $60,000 to the plan for the years ended December 31,
2002, 2001, and 2000.
EMPLOYEE STOCK OWNERSHIP PLAN
The Savings Bank maintained an ERISA qualified employee stock ownership plan
(ESOP) for eligible employees. Effective September 30, 2002, the ESOP was
terminated. The Bancorp accepted the unallocated shares in full satisfaction of
the outstanding loan balance of $289,000. The unallocated shares were accounted
as a treasury stock transaction by the Bancorp. During 1999, the ESOP borrowed
funds from the Company in the amount of $498,000 in order to purchase 49,136
shares at an average price of $10.13 per share. In addition, during 2000, the
ESOP used available cash in the plan to purchase 1,880 shares. Consolidated
stockholders' equity was reduced by the unpaid balance of the ESOP loan at
December 31, 2001 and 2000. Contributions of $64,000, $81,000, and $95,000 were
accrued or made to the ESOP to fund principal and interest payments for the
years ended December 31, 2002, 2001, and 2000. Selected ESOP information at
December 31, 2001, and 2000 follows:
2001 2000
---- ----
Shares allocated $ 100,816 $ 94,362
Unearned shares 28,052 34,506
------------ ------------
Total ESOP shares 128,868 128,868
============ ============
Total value of unearned shares $ 283,325 $ 362,313
============ ============
(Continued)
78.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 11 - EMPLOYEE BENEFIT PLANS (Continued)
Umbrella Bancorp considers outstanding only those shares of the ESOP that are
allocated and committed to be released when calculating both basic and diluted
earnings per share. The Savings Bank records the difference between the fair
value of the shares committed to be released and the cost of those shares to the
ESOP as a charge to additional paid-in capital with the corresponding increase
or decrease to compensation expense.
MANAGEMENT RECOGNITION PLAN
The Company's Management Recognition Plan ("MRP") provides for issue of shares
to officers and employees of the Company. Compensation expense is recognized
over the vesting period of the shares for the difference between exercise price
and the market value at issue date. Total shares issuable under the plan are
25,492 at December 31, 2002 and 2001. Unearned compensation is reported as a
reduction of stockholder's equity until earned.
STOCK OPTION PLANS
Umbrella Bancorp's Board of Directors adopted the 1991 Stock Option and
Incentive Plan (the 1991 Stock Option Plan), under which up to 429,800 shares of
Umbrella Bancorp's common stock were reserved for issuance by Umbrella Bancorp
upon exercise of incentive stock options to be granted to full-time employees of
Umbrella Bancorp and its subsidiaries from time to time. All 429,800 options
were awarded during 1993.
Umbrella Bancorp's Board of Directors adopted the Non-Qualified Stock Option
Plan for Non-Employee Directors (Non-Qualified Stock Option Plan) in 1991, under
which up to 429,800 shares of Umbrella Bancorp's common stock were reserved for
issuance by Umbrella Bancorp upon exercise of nonincentive stock options to be
granted to nonemployee directors of the Savings Bank from time to time. At
December 31, 1997, the Board of Directors approved a resolution to discontinue
any further grants under this plan.
Umbrella Bancorp's Board of Directors adopted the 1998 Incentive Stock Option
Plan for Employees, under which up to 400,000 shares of Umbrella Bancorp's
common stock were reserved for issuance by Umbrella Bancorp upon exercise of
stock options to be granted to employees from time to time.
(Continued)
79.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 11 - EMPLOYEE BENEFIT PLANS (Continued)
There were no options granted in 2002 and 2001. For options granted during 2000,
the weighted average fair values and exercise price at grant date are as
follows:
Weighted
Average
Number of Exercise Fair
Options Price Value
------- ----- -----
99,000 $10.58 $3.19
The activity in the stock option plans for 2000, 2001, and 2002 is summarized as
follows:
Weighted
Number Average
of Exercise
Options Price
------- -----
Outstanding at January 1, 2000 394,068 $ 6.14
Granted 99,000 10.58
Exercised (18,213) (3.52)
Forfeited (31,196) (5.98)
-------
Outstanding at December 31, 2000 443,659 7.25
Exercised (48,125) (5.01)
-------
Outstanding at December 31, 2001 395,534 6.45
Exercised (46,200) (3.96)
Forfeited (55,200) (6.00)
-------
Outstanding at December 31, 2002 294,134 6.93
=======
Options exercisable at year end are as follows:
Weighted
Number Average
of Exercise
Options Price
------- -----
December 31, 2002 253,134 $ 6.36
December 31, 2001 321,334 5.46
December 31, 2000 307,344 5.33
(Continued)
80.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 11 - EMPLOYEE BENEFIT PLANS (Continued)
At year-end 2002, options outstanding were as follows:
Outstanding Exercisable
----------- -----------
Weighted Average Weighted
Range of Remaining Average
Exercise Contractual Exercise
Prices Number Life Number Price
------ ------ ---- ------ -----
$ 2.88 - 3.85 118,134 .5 years 118,134 $ 3.78
5.00 - 6.88 40,000 1.6 years 40,000 5.80
7.22 - 8.66 24,000 4.0 years 24,000 8.01
9.00 - 11.00 107,000 5.8 years 68,000 10.15
16.00 5,000 1.0 years 3,000 16.00
-------------- ----------- ------------ ---------
Outstanding at year end 294,134 2.9 years 253,134 $ 6.36
============== =========== ============ =========
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of its business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations of interest rates. These
financial instruments represent commitments to fund loans and letters of credit
and involve credit and interest rate risk in excess of the amount recognized in
the consolidated statements of financial condition.
At December 31, 2002 the Savings Bank had funding commitments totaling $11.9
million. These commitments include $5.9 million for unused lines of credit, $4.3
million for the unfunded portion of construction loans, $1.4 million for letters
of credit, and $300,000 for commitments to originate loans. 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 has Community Reinvestment Act (CRA) investment commitments
outstanding of $1.5 million. These commitments include $1.2 million to be funded
over nine years for investment in the Chicago Equity Fund, $216,000 to be funded
over five years for investment in the Community Investment Corporation, and
$51,000 to be funded over two years for investment in the Kedzie Limited
Partnership. On March 31, 2003, the Savings Bank funded its commitments to the
Chicago Equity Fund and Community Investment Corporation of $1.2 million and
$216,000, respectively.
Also as of December 31, 2002 the Savings Bank had commitments to purchase
securities available-for-sale of $22.4 million.
(Continued)
81.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 13 - CAPITAL MATTERS
Information regarding common stock at December 31, 2002 and 2001 follows:
2002 2001
---- ----
Par value per share $ .01 $ .01
Authorized shares 9,000,000 9,000,000
Shares issued 2,117,434 2,071,234
Shares outstanding 1,723,586 1,705,438
Information regarding preferred stock at December 31, 2002 and 2001 follows:
Preferred Stock Series A Preferred Stock
------------------------ ---------------
2002 2001 2002 2001
---- ---- ---- ----
Par value per share $ 1,000 $ -- .01 $ .01
Authorized shares 10,000 -- 1,000,000 1,000,000
Shares issued and
outstanding 1,921 -- 592,681 592,681
The Company has issued 592,681 shares of goodwill preferred stock. The goodwill
preferred stock entitles the holders thereof to 75% of any settlement damages
awarded upon a final judgment to the Savings Bank, net of expenses and certain
other items, as a result of the Savings Bank's lawsuit against the United States
seeking damages for breach of contract related to the elimination and exclusion
of supervisory goodwill in the computation of the Savings Bank's regulatory
capital in connection with the Company's acquisition of the Savings Bank
("Goodwill Litigation"). At the time of the final judgment and award of damages,
if any, the goodwill preferred stock will either be (1) redeemed by the Company
for cash or (2) become convertible into common stock. The Company will be
entitled to retain the remaining 25% of any damages awarded to the Savings Bank,
net of expenses and certain other items, in the Goodwill Litigation.
On September 29, 2002, the Board of Directors of the Bancorp authorized the
issuance of up to 10,000 shares of Series A 8.0% Perpetual Preferred Convertible
Preferred Stock ("Series A Stock"). The Series A Stock has a par and face value
of $1,000. After March 31, 2003, the holders of record of the Series A Stock on
the dates specified below shall be entitled to receive, as and when declared by
the Board of Directors and out of assets of the Bancorp which are by law
available for payment of dividends, cumulative preferential cash dividends, at
the rate of $80.00 per share per annum, payable quarterly on the first day of
July, October, January and April in each year. Dividends on the Series A Stock
shall be cumulative, whether or not in any dividend period or periods after
March 31, 2003 there shall be surplus or net profits of the Company legally
available for the payment of such dividends. Dividends on the Series A Stock
shall be junior and
(Continued)
82.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 13 - CAPITAL MATTERS (Continued)
subordinate to the payment of the Bancorp's obligations for dividends or
payments under the Company's 11% Junior Subordinate Deferrable Interest
Debentures. After March 31, 2004, the Bancorp, at the option of the Board of
Directors, may at any time or from time to time redeem the whole or any part of
the Series A Stock by paying therefore in cash $1,000 per share plus an amount
equal to all dividends thereon declared but unpaid on the date fixed for
redemption (the "Redemption Price"). Until March 31, 2008, each holder of Series
A Stock may at any time upon surrender of the certificates therefore, convert
any or all of such holder's Series A Stock into fully paid and nonassessable
shares of Common Stock of the Bancorp, at the rate of 166 shares of Common Stock
for each share of Series A Stock so surrendered for conversion.
For the period September 30, 2002 to December 31, 2002, the Company received
from its two principal shareholders cash totaling $2,075,000 for 1,921 shares of
Series A Preferred Stock ($1,921,000), 18,000 shares of common stock ($59,000)
related to the exercise of stock options, and $95,000 for available-for-sale
securities at the higher of fair market value or amortized cost.
For the period January 1, 2003 to March 31, 2003, the Company received from
three of its principal shareholders cash totaling $7,547,000 for 6,064 shares of
Series A Stock ($6,064,000), 118,134 shares of common stock ($447,000) related
to the exercise of stock options, and $1,036,000 for available-for-sale
securities at the higher of fair market value or amortized cost.
On September 30, 2002, the Bancorp made a $2 million cash contribution to the
Savings Bank in order to increase the Savings Bank's capital ratios. On March
31, 2003, the Bancorp made a $1.5 million cash contribution to the Savings Bank
in accordance with the capital plans as discussed in Note 2 - Regulatory
Compliance and Business Plan.
Pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), savings institutions must meet three separate minimum capital
requirements. There are no similar minimum capital requirements for thrift
holding companies. Failure to meet minimum capital requirements can initiate
certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Savings Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Savings Bank must meet
specific capital guidelines that involve quantitative measures of Savings Bank
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Savings Bank capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
(Continued)
83.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 13 - CAPITAL MATTERS (Continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Savings Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined) to risk-weighted
assets (as defined) and Tier I capital (as defined) to assets (as defined).
Management believes, as of December 31, 2002 and 2001, that the Savings Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 2002, the Savings Bank was well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the Savings Bank must maintain minimum 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.
On November 28, 2001, the Savings Bank issued and sold $3.0 million subordinated
debentures in a pooled security offering. On December 5, 2001, the Savings Bank
filed an application with the OTS seeking inclusion of the proceeds of the sale
of the debentures in regulatory "Tier II" (risk weighted) capital. As of June
28, 2002, the OTS approved the application. Thus, the Savings Bank's "Tier II"
ratios below reflect the $3.0 million of subordinated debentures as of December
31, 2002 and the "Tier II" ratios do not reflect the subordinated debentures as
of December 31, 2001.
The Savings Bank's actual capital amounts (in thousands) and ratios are as
follows as of December 31, 2002 and 2001:
To Be Well-
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action
------ -------- ------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 2002
Total capital
(to risk-weighted assets)
Savings Bank $24,226 13.61% $14,245 8.00% $17,806 10.00%
Tier I capital
(to risk-weighted assets)
Savings Bank 19,047 10.70 7,122 4.00 10,684 6.00
Tier I capital
(to adjusted assets)
Savings Bank 19,047 5.76 13,227 4.00 16,533 5.00
(Continued)
84.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 13 - CAPITAL MATTERS (Continued)
To Be Well-
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action
------ -------- ------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 2001
Total capital
(to risk-weighted assets)
Savings Bank $32,745 10.77% $24,329 8.00% $30,411 10.00%
Tier I capital
(to risk-weighted assets)
Savings Bank 30,261 9.95 12,164 4.00 18,247 6.00
Tier I capital
(to adjusted assets)
Savings Bank 30,261 5.82 20,785 4.00 25,981 5.00
NOTE 14 - SEGMENT FINANCIAL INFORMATION
During 2001, the Company discontinued monitoring discounted loans as a reporting
segment. Prior to 2001, the operating segments were determined by the products
and services offered, primarily distinguished between banking and discount loan
operations. Loans, investments, and deposits provide the revenues in the banking
operation; fee income provided the primary revenue for mortgage banking interest
income; and discount accretion provide the primary revenue for discount loan
workout. All operations are domestic.
The accounting policies used for the operating segments are the same as those
described in the summary of significant accounting policies. Income taxes are
allocated to the banking segment. No indirect expenses are allocated.
Information reported internally during 2000 for performance assessment follows.
The column for other information primarily includes activity between segments
which is being eliminated.
Discount Total
(In thousands) Banking Loans Other Segments
------- ----- ----- --------
Net interest income $ 6,372 $ 886 $ -- $ 7,258
Provision for loan losses 1,178 40 -- 1,218
Other revenue 10,593 (129) (373) 10,091
Other expenses 10,229 344 -- 10,573
Income tax expense (benefit) 1,227 -- -- 1,227
Segment profit (loss) 4,331 373 (373) 4,331
Segment assets 462,896 12,285 (12,088) 463,093
(Continued)
85.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 15 - PARENT COMPANY FINANCIAL INFORMATION
Condensed statements of financial condition, operations, and cash flows of
Umbrella Bancorp, Inc. follow:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31,
---------------------------------
2002 2001
---- ----
(In thousands)
Assets
Cash $ 192 $ 558
Interest-bearing deposits 111 89
------- -------
Total cash and cash equivalents 303 647
Securities available-for-sale 3,371 7,884
Loans receivable, net 29 2,678
Mortgage loan servicing rights 288 751
Due from subsidiary -- 144
Deferred tax assets 4,433 751
Investment in banking subsidiary 23,548 29,163
Investment in nonbank subsidiary 132 639
------- -------
Total investments in subsidiaries 23,680 29,802
Other assets 2,470 2,887
------- -------
Total assets $34,574 $45,544
======= =======
Liabilities and stockholders' equity
Borrowed money $ 6,545 $10,160
Due to subsidiary 1,929 --
Other liabilities 670 557
Junior subordinated debt 17,250 17,250
Stockholders' equity 8,180 17,577
------- -------
Total liabilities and stockholders' equity $34,574 $45,544
======= =======
(Continued)
86.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 15 - PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF OPERATIONS
Year ended December 31,
-----------------------------------------
2002 2001 2000
---- ---- ----
(In thousands)
Interest income $ 893 $ 1,439 $ 1,236
Interest expense 2,557 3,213 2,375
---------- ----------- -----------
Net interest expense (1,664) (1,774) (1,139)
Provision for loan losses (1,812) (527) --
Dividends from bank subsidiary -- -- 2,200
Equity in undistributed earnings (losses)
of subsidiaries (9,031) 999 3,402
Other noninterest income 10 167 --
Gain (loss) on sales of securities available-for-sale (16) 163 139
Profits (losses) on trading account activity -- 608 (35)
Loss on sale of loans (70) -- --
Noninterest expense (1,816) (1,105) (948)
---------- ----------- -----------
Income (loss) from continuing operations
before income taxes (14,399) (1,469) 3,619
Income tax benefit (2,102) (832) (712)
---------- ----------- -----------
Net income (loss) $ (12,297) $ (637) $ 4,331
========== =========== ===========
(Continued)
87.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 15 - PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31,
------------------------------------------
2002 2001 2000
---- ---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (12,297) $ (637) $ 4,331
Adjustments to reconcile net income (loss)
to net cash provided from operating activities
Net change in trading account activity -- 770 --
Provision for loan losses 1,812 527 --
Loss (gain) on the sales of securities
available-for-sale 16 (163) (139)
(Gain) loss on trading account securities -- (608) 35
Loss on sale of loans 70 -- --
Dividends from nonbank subsidiary 233 -- --
Equity in undistributed earnings (losses)
of subsidiaries 9,031 (999) (3,402)
ESOP expense 59 64 21
Change in other assets (2,694) 1,134 (463)
Change in inter-company balance 148 (3,142) 2,998
Change in other liabilities 2,038 (728) (561)
----------- ----------- -----------
Net cash from operating activities (1,584) (3,782) 2,820
CASH FLOWS FROM INVESTING ACTIVITIES
Loans purchased, net 416 (4,799) (1,006)
Proceeds from the sales of securities 13,608 20,947 1,144
Purchases of securities (9,321) (17,362) (876)
Redemption of GFS preferred stock investment -- 3,600 600
Return of Capital from nonbank subsidiaries 312 -- --
Capital contribution into subsidiaries (2,000) -- --
----------- ----------- -----------
Net cash from investing activities 3,015 2,386 (138)
(Continued)
88.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 15 - PARENT COMPANY FINANCIAL INFORMATION (Continued)
STATEMENTS OF CASH FLOWS
Year ended December 31,
------------------------------------------
2002 2001 2000
---- ---- ----
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in borrowed money, net $ (3,615) $ 4,284 $ 472
Proceeds from exercise of stock options 183 251 64
Purchase of treasury shares -- (5,121) --
Proceeds from issuance of preferred stock 1,921 -- --
Dividends paid (264) (371) (402)
----------- ----------- -----------
Net cash from financing activities (1,775) (957) 134
----------- ----------- -----------
Change in cash and cash equivalents (344) (2,353) 2,816
Cash and cash equivalents at beginning of year 647 3,000 184
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 303 $ 647 $ 3,000
=========== =========== ===========
Supplemental disclosure of noncash
investing activities
Investment in non-banking subsidiary $ -- $ -- $ 570
Capital contribution to banking subsidiary
in the form of securities available-for-sale
and loans -- 2,928 1,250
Data processing credit received in lieu of
cash on sale of GFS preferred stock -- 400 --
(Continued)
89.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of Umbrella Bancorp's financial instruments as of
December 31, 2002 and 2001 are set forth in the following table, followed by the
methods and assumptions used.
2002 2001
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In thousands)
Financial assets
Cash $ 2,089 $ 2,089 $ 647 $ 647
Interest-earning deposits 69,811 69,811 37,002 37,002
Trading account securities - - 6,053 6,053
Securities available-for-sale 105,613 105,613 123,118 123,118
Securities held-to-maturity - - 1,859 1,838
Loans, including loans held-for-
sale 116,452 119,531 315,409 317,209
FHLB of Chicago stock 2,947 2,947 2,800 2,800
Accrued interest receivable 1,861 1,861 5,272 5,272
Financial liabilities
Deposits without stated maturities 156,966 156,966 197,210 197,210
Deposits with stated maturities 125,081 131,551 260,937 270,152
Borrowed money 22,305 23,781 28,343 29,113
Junior subordinated debt 17,123 9,931 16,603 16,630
Custodial escrow balances 7,423 7,423 9,499 9,499
Accrued interest payable 1,232 1,232 1,707 1,707
The following methods and assumptions are used by Umbrella Bancorp in estimating
the fair value amounts for its financial instruments.
(A) CASH AND INTEREST-BEARING DEPOSITS
The carrying value of cash and interest-bearing deposits approximates fair value
due to the short period of time between origination of the instruments and their
expected realization.
(B) SECURITIES AVAILABLE-FOR-SALE, SECURITIES HELD-TO-MATURITY, TRADING
SECURITIES, AND FHLB OF CHICAGO STOCK.
The fair value of securities available-for-sale and held-to-maturity and trading
securities was estimated using quoted market prices. The fair value of FHLB
stock is based on its redemption value.
(Continued)
90.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
(C) LOANS RECEIVABLE AND ACCRUED INTEREST RECEIVABLE
The fair value of loans receivable is based on values obtained in the secondary
market. The loan portfolio is segmented into fixed and adjustable interest rate
categories. For fixed rate loans, fair value is estimated based on quoted market
prices of similar loans sold in conjunction with securitization transactions,
adjusted for differences in loan characteristics. For adjustable rate loans that
reprice frequently and with no significant change in credit risk, fair values
are based on carrying values. The carrying amount of accrued interest receivable
approximates its fair value due to the relatively short period of time between
accrual and expected realization.
(D) DEPOSITS, ESCROWS, AND INTEREST PAYABLE
The fair value of deposits with no stated maturity, such as statement savings,
NOW, and money market accounts, and escrows is disclosed as the amount payable
on demand.
The fair value of fixed-maturity deposits is the present value of the
contractual cash flows discounted using interest rates currently being offered
for deposits with similar remaining terms to maturity.
The carrying amount of interest payable approximates its fair value due to the
relatively short period of time between accrual and expected realization.
(E) BORROWED FUNDS AND JUNIOR SUBORDINATED DEBT
The fair value of junior subordinated debt was estimated using quoted market
prices. The fair value of borrowed funds is the present value of the contractual
cash flows, discounted by the current rate offered for similar remaining
maturities.
(Continued)
91.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 17 - EARNINGS PER SHARE
The following table sets forth the components of basic and diluted earnings
(loss) per share. Basic and dilutive loss per share are the same for 2002 and
2001 as diluted loss per share would be anti-dilutive.
Year ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
(Dollars in thousands, except per share data)
Numerator
Net income (loss) $ (12,297) $ (637) $ 4,331
=========== =========== ===========
Denominator
Basic earnings (loss) per share -
weighted average shares outstanding 1,715,433 1,723,952 2,008,056
Effect of dilutive stock options
outstanding -- -- 157,070
----------- ----------- -----------
Diluted earnings (loss) per share -
weighted average shares outstanding 1,715,433 1,723,952 2,165,126
=========== =========== ===========
Basic earnings (loss) per share $ (7.17) $ (.37) $ 2.16
Diluted earnings (loss) per share (7.17) (.37) 2.00
NOTE 18 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows:
2002 2001 2000
---- ---- ----
Unrealized holding gains on
securities available-for-sale $ 1,068 $ 682 $ 166
Less reclassification adjustments for gains
(losses) recognized in income (502) 1,411 (111)
------- ------- -------
Net unrealized gains (losses) 1,570 (729) 277
Tax effect (598) 275 (105)
------- ------- -------
Other comprehensive income (loss) $ 972 $ (454) $ 172
======= ======= =======
(Continued)
92.
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
NOTE 19 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
----- ------ ----- ------
2002
Total interest income (a) $ 7,885 $ 7,286 $ 6,627 $ 4,268
Net interest income (b) 1,918 1,818 955 339
Net loss (c) (d) (561) (8,375) (1,965) (1,396)
Basic earnings (loss) per share (.33) (4.86) (1.14) (.83)
Diluted earnings (loss) per share (.33) (4.86) (1.14) (.83)
2001
Total interest income $ 8,755 $ 9,674 $ 9,865 $ 9,913
Net interest income 1,444 1,888 2,392 2,344
Net income (loss) (e) 380 207 (301) (923)
Basic earnings (loss) per share .19 .12 (.18) (.50)
Diluted earnings (loss) per share .17 .11 (.18) (.50)
(a) Interest income declined during the fourth quarter due to declining
interest rates and reductions in the Company's interest earning assets as
it executed its business plan.
(b) During the third and fourth quarters of 2002, the Savings Bank incurred
additional interest expense of $638,000 and $362,000, respectively due to
the early redemption of brokered deposit CDs.
(c) During the second and third quarters of 2002, the Company recorded
provisions for loan losses of $8.6 million and $1.7 million, respectively.
During the fourth quarter of 2002, the Savings Bank recaptured $500,000 of
the provisions for loan losses recorded in previous quarters mainly due to
the successful termination of the purchase/repurchase loan program.
(d) During the second quarter of 2002, the Company recorded a $2.5 million
reserve against its interest in limited partnerships that invest in PMSRs.
(e) During the fourth quarter of 2001, the allowance for loan losses was
increased as a result of the Savings Bank's decision to classify mortgage
loans securing purchase/repurchase lines of credit facilities with
weaknesses attributable to mortgage broker and origination deficiencies, as
well as purchases and originations of commercial and commercial real estate
loans and direct financing leases, which are considered higher risk than
the Savings Bank's traditional loan products primarily secured by
residential real estate.
93.
UMBRELLA BANCORP, INC.
Shareholder Information
DIRECTORS AND OFFICERS
UMBRELLA BANCORP, INC.
John G. Yedinak Sergio Martinucci
President and Chief Executive Officer Senior Vice President, Coldwell Banker
Chairman of the Board Residential Realtors
Vice President and Director
Frances M. Pitts Donald G. Wittmer
Executive Vice President, President and Owner, Wittmer Financial
Secretary and Director Services, Ltd.
Director
Colleen A. Kitch Arthur E. Byrnes
Executive Vice President Chairman, Deltec Asset Management
Corporation, LLC
Director
Frank J. Shinnick Dennis G. Carroll
Chief Financial Officer Detective, City of Chicago
Police Department
Marie Goudie
Controller
UMBRELLABANK, FSB
John G. Yedinak Sergio Martinucci
President, Chief Executive Officer Senior Vice President, Coldwell Banker
and Director Residential Realtors
Chairman of the Board
Frances M. Pitts Donald G. Wittmer
Executive Vice President, President and Owner, Wittmer Financial
General Counsel and Secretary Services, Ltd.
Director Director
Colleen A. Kitch Arthur E. Byrnes
President Chairman, Deltec Asset Management
Corporation, LLC
Frank J. Shinnick Director
Chief Financial Officer
Rebecca L. Leon Dennis G. Carroll
Vice President, Retail Operations Detective, City of Chicago Police
Dept.
Director
Marie C. Goudie George P. Yedinak
Assistant Vice President and Regulatory Vice President and Chief Information
Accounting Officer Officer
David Scherer Teena D. Juergens
AVP/Managing Accounting Officer Vice President
94.
UMBRELLA BANCORP, INC.
Shareholder Information
STOCKHOLDER REFERENCE
Corporate Headquarters Independent Auditors
Umbrella Bancorp, Inc. Crowe Chizek and Company LLC
220-222 West Huron Street One Mid America Plaza
Chicago, Illinois 60610 Oak Brook, Illinois 60522
(312) 397-8880
(Effective April 27, 2003)
Chicago Counsel Transfer Agent and Registrar
Kemp & Grzelakowski, Ltd. LaSalle Bank, N.A.
1900 Spring Road Trust and Asset Management Division
Suite 500 135 South LaSalle Street
Oak Brook, Illinois 60523-14495 Chicago, Illinois 60603
(312) 904-2584
Market Makers Annual Report on Form 10-K
RBC Dain Rauscher Copies of Umbrella Bancorp, Inc.'s 2002
1 South Wacker Drive Annual Report on Form 10-K
Suite 1900 filed without exhibits with the
Chicago, Illinois 60606 Securities and Exchange Commission
(888) 655-4135 are available without charge to
stockholders, upon written
request to:
Keefe Bruyette and Woods, Inc. Frances M. Pitts, Corporate Secretary
787 7th Avenue, 4th Floor Umbrella Bancorp, Inc.
New York, New York 10019 5818 S. Archer Road
(800) 221-3246 Summit, Illinois 60501
Ryan Beck and Company, LLC Annual Meeting
220 South Orange Avenue The annual meeting of stockholders will
Livingston, New Jersey 07039 be held at 2:00 p.m. on May 28, 2003 at
(800) 342-2325 220-222 West Huron Street
Chicago, Illinois 60610
Investor Information
Stockholders, investors, and analysts Stockholders are encouraged to attend.
interested in additional
information may contact: Internet Banking Channel
John G. Yedinak, President and CEO, www.umbrellabank.com
at the Corporate Headquarters
OFFICE LOCATIONS
Home Office
220-222 West Huron Street
Chicago, Illinois 60610
(312) 397-8880
95.
UMBRELLA BANCORP, INC.
Shareholder Information
STOCK PRICE INFORMATION
Umbrella Bancorp Inc.'s common stock is traded on the NASDAQ Over the Counter
Market under the symbol UMBR. The table shows the reported high and low sale
prices of common stock and the dividends paid per share during the periods
indicated.
High Low Dividends
---- --- ---------
Year ended December 31, 2002:
First quarter $ 9.77 $ 7.40 $ .05
Second quarter 9.35 7.00 .05
Third quarter 8.60 5.00 .05
Fourth quarter 4.90 3.25 .00
Year ended December 31, 2001:
First quarter $ 14.81 $ 10.13 $ .05
Second quarter 14.13 9.00 .05
Third quarter 12.25 11.00 .05
Fourth quarter 11.00 9.98 .05
Year ended December 31, 2000:
First quarter $ 11.50 $ 10.50 $ .05
Second quarter 13.00 9.00 .05
Third quarter 10.13 9.00 .05
Fourth quarter 16.00 10.50 .05
96.